Inflation will affect supply chains in Europe and the US differently.
While the European logistics sector may be greatly impacted, the U.S. could even avoid the recession.
In a context where inflation affects both businesses and consumers, the universal response of central banks has been to raise interest rates in an effort to address these inflationary pressures. However, this approach masks the fact that for many markets the underlying causes of inflation are not the same. It is important to understand the profound principles of this phenomenon, as it will have a great influence on the flows of national and global goods and, therefore, on the development of the supply chain and logistics industry, reports Ti.
For example, in Europe, inflation is largely «imported» due to the energy crisis related to the supply and cost of natural gas. In the US, the problem is rather traditional, caused by a runaway domestic economy, fueled by a $5 billion government stimulus package. Therefore, the Federal Reserve’s action to raise interest rates is an attempt to induce a recession («destruction of demand»), whereas in Europe the recession is inevitable, regardless of the fiscal policies adopted.
Impact on the supply chain
The variant underlying the causes of economic and fiscal instability is important for the supply chain industry’s prospects. Europe’s logistics sector is likely to suffer significantly from the slowdown caused by stagnant manufacturing production, weighed down by energy costs and the inability to pass on price increases to struggling consumers. Exporters will also be affected as they cannot compete effectively with US and Chinese competitors.
Even within the region there will be differences in prospects. For example, France has taken the political decision to nationalise its largest energy supplier, EDF, allowing the government to control prices. Although this may be effective in the short term, cushioning energy costs over a period of months or even years, it will have a huge cost to the country’s fiscal position that can have even worse repercussions in the future.
U.S. Can Avoid Recession
Meanwhile, the U.S. situation is different. If the Federal Reserve is able to achieve a «soft landing», a large-scale recession can be avoided. Many American companies continue to have large cash reserves after the pandemic and are in a good position to weather any economic storm without having to make difficult operational decisions, such as cutting staff or investments. Consequently, the country’s logistics industry should be less exposed to the internal pressures faced by its counterparts in Europe.
There is also the question of what will happen when China’s manufacturing industry returns to full operation. Today, the government continues to impose closures in many parts of the country due to its «Covid Zero» policy. The return to normalcy will lead to an increase in economic activity that will boost the logistics industry and supply chain in the rest of Asia, as well as in China itself. However, it will also lead to an increase in demand for gas which will only aggravate Europe’s problems and impact its competitiveness through higher prices.
European banks need to shore up the euro
Why would European bankers want to raise interest rates if the economy is already collapsing? After all, higher rates will only increase the hardship of indebted consumers and reduce business investment. Partly because they have no other tools at their disposal and need to be seen to do something, but it is also an attempt to shore up the currencies that have plummeted against the dollar to historic lows. Weak currencies make it more expensive to import foreign products, especially those traded in dollars, such as oil. There is also the damage to the reputation of a euro trading at less than a dollar.
German industry is particularly affected by the energy crisis. According to one commentator, gas production costs are eight times higher than those of US competitors, which makes many German producers uncompetitive on the world market.
USA. can rely on domestic supplies and is therefore largely immune to the global forces that affect much of the rest of the world. Many large European gas users, such as fertilizer manufacturers, have already been forced to close, leading to shortages and higher prices not only in Europe but in much of the rest of the developing world.