The Economic Outlook for 2022 and Beyond Will Be Impacted by Supply Chain Issues
Last Wednesday, November the 3rd, the Conference Board, put out their forecast for global economic growth. World growth for 2022 is forecast to grow at 3.9%; growth across all mature economies is forecast to be up by 3.9%; and the US and China are forecast to grow at 3.8% and 5.5% respectively.
The Conference Board is a research group supported by a broad membership base. The Conference Board and the World Bank are the two organizations best known for global forecasting.
To sum up the forecast, the Conference Board has forecast fast growth for this year, a bit higher than what would be considered normal growth through 2026, and they then see growth falling to traditional levels from 2027 through 2031.
Prior to releasing the forecast, the main economists at the Conference Board discussed their findings and thinking with a group of journalists. The discussion was more interesting than the report they released.
While several upside and downside risks associated with the forecast were discussed, global supply chain issues, labor issues, and businesses technology investments were discussed prominently.
The supply chain disruptions, which have negatively impacted growth, are viewed as primarily a function of strong demand coupled with COVID related supply disruptions. As people were stuck at home and stopped spending their discretionary income on restaurants, entertainment, and other services, more money was spent on food and consumer goods. On the supply side, China, the manufacturing capital of the world, did shut regions and ports as COVID rates rose in different regions of the country at different times. The Board does see demand returning to more normal levels in 2022 and supply improving as COVID recedes.
The semiconductor shortage, however, will be harder to resolve. Demand for goods that use computer chips will remain high. Because of the lead time to build new fabs, supply will not catch up with demantrade war,d next year
The move toward deglobalization – as companies move from efficient to resilient supply chains – will depress growth over the long term. Deglobalization has been occurring since Trump was elected President and the US-China trade war began. But the pandemic has increased the trend toward more global supply chains. Nations are setting up industrial policies to protect the supply chains of companies headquartered in their domain. These policies are meant to ensure that key inputs – semiconductor chips and rare earth metals, for example – are not being held hostage by the nations that control these inputs. These policies are accelerating the trend for Western companies to reshore and to diversify their supply base. But to the extent that these activities lead to higher prices for the finished products, demand will be depressed as consumers choose to substitute other products or forego the purchase altogether. The Conference Board summed it up by saying that less trade means lower growth.
However, this diversification will not occur overnight. China still has great advantages in terms of their infrastructure, skille labor base, and manufacturing know how.
Labor shortages, which clearly effect growth, were also discussed. The economists believe that to a certain extent, workers are becoming more selective. But this argument can be an oversimplification for a more complex reality. In the US, three million more workers retired than were expected to retire during the pandemic. In part, this was because older workers are at greater risk of being harmed by COVID. But many older workers found that their retirement plans, and the value of their homes, increased significantly in value. This group of workers could afford to retire at a younger age than they had anticipated.
For younger workers, however, the financial payments from the government did give many a buffer that could last several months. While workers can be picky in the near term, most will have to come back to work in 2022.
These workers will have more choices. Fewer companies are requiring college degrees, for example. The share of young people with an education that extends beyond high school has decreased. Vocational schools shut down during the pandemic. As one economist pointed out, “you can learn history remotely,” but remote learning is not the right way to teach someone how to be a mechanic. This also means, businesses are seeing fewer candidates with the skills they seek, and company training programs will become more important.
To attract the workers needed, companies are paying new workers higher wages and offering bonuses and better benefit plans. As the young go back to work in 2022, the need to do this will decrease. Wage inflation, nevertheless, is still all but certain next year. That is because the high wages paid to new workers, who can’t work at the same level of efficiency as the existing workforce, is creating discontent among the incumbent workers. Existing workers will get “big spikes in raises.”
Demographic issues, in the longer term, will also contribute to a shortage in workers. The citizenry is aging in the established economies as well as China. To overcome this, businesses are increasingly investing in digital technologies. These technologies will increase productivity and growth. Business sentiment is important. To the extent that business leaders believe digital investments are wise, total factor productivity will increase. However, one economist warned, the decade before the pandemic hit had the slowest growth in productivity in many decades. Nonetheless, in certain industries, technology is clearly replacing humans and that the pandemic accelerated this.
While supply chain and labor issues will depress growth, it is important to put this in perspective. Global economies will grow significantly faster than is the norm. In the US, for example, growth of 1.8% would be considered normal. Anything above 1.8% growth in the US is good. Next year, the Conference Board is forecasting growth of 3.8%. That is a growth rate twice as high as what would normally be expected.
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