IMF: Global supply chains face serious 'fragmentation risk'

"Worst is yet to come" according to the latest IMF World Economic Outlook, with uncertainty & inflation potentially leading to supply chain reconfiguration

The International Monetary Fund (IMF)’s latest World Economic Outlook report (October 2022) sees increasing ‘inflation and uncertainty’ that could very well lead to a “reconfiguration of supply chains”.

This could pose a long-term threat to resilience and stability, while the energy crisis is not looking to let up any time soon, with predictions that it will continue to rise and likely peak in 2023.

Economic counsellor and director of the research department at the IMF, Pierre-Olivier Gourinchas, said, “the energy crisis, especially in Europe, is not a transitory shock.

“The geopolitical realignment of energy supplies in the wake of the war is both broad and permanent. Winter 2022 will be challenging, but winter 2023 will likely be worse.”

Gourinchas expressed his concerns about potential “fragmentation risk”.

He said that this “could happen, maybe not in the immediate future, but further down the road.”

He then posed the ominous question: “Are we about to see a reconfiguration of supply chains because of geo-economic fragmentation?”

Gourinchas said that geopolitical realignments of supply chains following Russia’s war in Ukraine will be a long-term outcome of the conflict and high inflationary pressures along the supply chain have yet to peak.

According to the World Economic Outlook, “global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades.

“The cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on the outlook.”

The report also expressed that global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023.

This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic.

In terms of global inflation forecasts, they are predicted to rise from 4.7 percent in 2021 to 8.8 percent in 2022, but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024.

However, of course, the impact is cumulative. If inflation does indeed fall to 4.1 percent by 2024 as forecast, the economic toll will still be a rise-on-rise of previous years, and prices will not cease to climb but merely slow down in their rate of increase.

That’s inflation 101, and suffers the unerring description of ‘price stability’. 

The IMF also stressed “the war in Ukraine is still raging” and any further escalation in the war had the potential to exacerbate the energy crisis.

The Russia-Ukraine conflict has reportedly already had a heavy and measurable impact on the five largest industries in the world.

Gourinchas said that governments can help build global resilience by placing supply chain diversification at the heart of fiscal policy. 

“Fiscal policy can help economies adapt to a more volatile environment by investing in productive capacity, human capital digitisation, green energy and supply chain diversification. Expanding these can make economies more resilient when the next crisis comes,” he said.

“Overall, this year’s shocks will reopen economic wounds that were only partially healed post-pandemic. In short, the worst is yet to come and, for many people, 2023 will feel like a recession.”

Supply chain fragmentation is an unsettling but increasingly potential reality. “That's something that is certainly a worry,” said Gourinchas.

“That's something that we would certainly not want to see. We like to see diversification of supply chains so that economies can become more resilient, and certainly not anything that looks like blocs.”

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