HONG KONG (BLOOMBERG) - Supply chains that rattled the global economy through the coronavirus pandemic are unleashing another shock as efforts to choke off trade with Russia strain resources ranging from fertiliser needed for crops and palladium for car-making, to oil that is used to produce almost everything.
The upshot: a world economy that again faces the prospect of stagflationary forces as inflation quickens and growth fades, compelling central banks to choose which to tackle while fearing the challenge they do not take on then gets out of hand.
The choice is even starker now than it was during the early days of the pandemic. Back then, monetary policymakers elected to buoy demand as a recession hit. Now inflation is at multi-decade highs, forcing them to focus on runaway prices, although perhaps alert to the risk they may have to move more slowly than anticipated.
"Were this 2022 supply shock a first, central banks would be more confident of its transitory inflation impact," said Deutsche Bank chief international strategist Alan Ruskin.
"But this is an inflation shock compounding pre-existing evidence of sticky inflation, so adding to concerns that policy will have to treat attendant higher prices as more than a temporary phenomena, even if growth slows."
Supply line crisis
Already, signs are mounting that supply lines are fraying anew as the sanctions-driven economic blockade increases Russian President Vladimir Putin's reliance on domestic production and prevents Russian companies from reaching markets and investors abroad.
Almost all of the 10-largest container shipping companies - responsible for moving about 80 per cent of global trade - have stopped accepting bookings for Russian cargo, and ports from Europe to the United States are turning away the nation's vessels. Some companies are choosing to self-sanction by refusing to buy Russian commodities, even if it remains legal to do so.
The fallout is extending far beyond Russia and Ukraine, with A.P. Moller-Maersk, the world's No. 2 container carrier, warning customers "this is a global impact, and not only limited to trade with Russia".
For automakers, the dependence on Russian supplies is deep. The country is the third-largest supplier of nickel in lithium-ion batteries and provides 40 per cent of the palladium for catalytic converters, with that metal also impacted by widespread flight bans. About 90 per cent of US semiconductor-grade neon supplies comes from Ukraine, according to Fitch.
Japan's biggest carmakers joined the widening global corporate pullback from Russia, following the likes of Ford Motor. Others in closer proximity to the war, such as Germany's BMW and Volkswagen, are warning of production outages. Shares of Renault, the European carmaker most exposed to Russia, have tumbled almost 25 per cent since the invasion began.
In the US, Boeing is in a bind after the US banned flights by a Russian-operated company it relies upon, meaning it cannot transport some structures from other places to its main wide-body plant in Everett, Washington.
Titanium is the other vital input for the aerospace industry, with firms stockpiling the key material and looking to diversify away from Russia. Engine maker Safran gets almost half of its titanium from Russia's VSMPO-Avisma Corp, while Rolls-Royce Holdings said 20 per cent of its titanium comes from the country.
Fuel, food soaring
The isolation of a commodities powerhouse also has prices for fuel and food soaring. Oil, of which Russia produces more than 10 per cent of the world's output, is now topping US$110 a barrel, while European natural gas hit an all-time high this week. Wheat soared past US$11 a bushel to the highest level in 14 years.
Even prices for the widely used nitrogen fertiliser urea surged over the past week, drawing howls of protest from farmers as far afield as Iowa and Brazil.
All told, the mounting supply chain crisis could end up being enough to knock US$1 trillion off the value of the world economy and add 3 per cent to global inflation this year, according to Britain's National Institute for Economic Research (NIESR).
"The conflict in Ukraine imposes further economic stress on a system stretched by Covid," said NIESR director Jagjit Chadha. "Supply chains will be further fractured, and monetary and fiscal policies put under a severe examination."
Of course, Russia still had the most to lose, with its output set to be almost 10 per cent lower annually in the long term than if trade relations had not changed, according to data from the Kiel Institute for the World Economy and the Austrian Institute of Economic Research.
But around the world, economists are also raising their forecasts for inflation and cutting those for growth. JPMorgan Chase & Co economists now see global growth of 3.1 per cent on a fourth quarter to fourth quarter basis, down 0.8 percentage point since Feb 18. And they forecast inflation of 4.6 per cent in the final three months of the year, up 0.9 percentage point.
At issue for central banks are the trade-offs between raising rates to offset a supply side inflation jolt they are not equipped to fix, just as those pressures weigh on consumer spending and corporate confidence.
Scotiabank's head of Asia-Pacific economics Tuuli McCully said: "The key question mark is global monetary policymakers' response: Will they prioritise economic growth amid elevated uncertainty or opt to tighten monetary policy even faster due to the inflationary shock."
The betting of most is that they will still focus on restraining inflation before it becomes entrenched in their economies. The Organisation for Economic Cooperation and Development reported on Thursday that inflation averaged 7.2 per cent across its members in January, the most since 1991.
It is not only the central banks thinking about the economic aftershocks. The war will also force European governments to borrow more to pay for an influx of migrants and strengthen their armies.
Mr Gary Luk, who runs a Hong Kong-based freight forwarding company, said about 20 per cent of his business has been affected by the war because it involves organising cargo, including audio equipment and electronic gadgets, to be flown or shipped from China to Eastern Europe.
Plunging currencies mean his clients in Russia and Ukraine face skyrocketing costs to pay for his service in US dollars, so they are delaying payment, Mr Luk said. Overdue payment has amounted to a six-digit figure in dollars, putting increasing pressure on his company's cash flow, he said.
"Now we don't dare to accept new orders from the region," Mr Luk said. "We've already been suffering from rising charges by airlines and shipping companies, and the war now is adding insult to injury."
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