‘Slowbalisation’ stoking inflation

Economists are warning that a reversal of globalisation will keep inflation higher for longer as firms diversify their supplier base to ensure reliable supplies of raw materials, intermediate inputs, parts, consumables and finished products for resale.

The trend towards relying on local suppliers is quickly putting ‘slowbalisation’ on the list of things to worry about.

The term was apparently coined by Dutch economist Adjiedj Bakas in 2015 after his research found that globalisation and the reliance on global supply chains started to decline after the financial crisis of 2008. For decades, globalisation and increasing global trade was praised for the longest period of global economic growth.

However, worldwide disruption in travel and transport during the Covid-19 pandemic, increasing fuel and energy prices, and the recent havoc caused to supply networks by the Russian invasion of Ukraine has accelerated slowbalisation.

Even smaller events – like the cargo ship that got stuck in the Suez Canal for six days in March 2021 – showed that the global supply chain can be disrupted quite easily.

“The world may see more slowbalisation,” says Maarten Ackerman, chief economist at Citadel. “Countries realise that inflation is linked to the shortfalls of globalisation.”

He explains: “Slowbalisation occurs when countries start diversifying their supply from single to multiple trading partners and local manufacturers.

“Although this strategy helps countries to secure supply, it will exacerbate high inflation in the short term, because countries will no longer look for the cheapest supply of goods,” says Ackerman.

“Add that to the other current drivers of inflation, such as global rising fuel and food prices, and goods will become more expensive.

“This suggests that inflation is going to be sticky for a long time.”

Citadel expects that inflation will start to decline in 2022, but will remain well above central bank targets.

“We expect we’ll have to manage above-average inflation, of about 3.5%, for the next three years. This is a result of the supply issues that will take time to resolve,” says Ackerman.

He says rising prices of food, energy and petrol and increases in mortgage repayments are eating into disposable incomes and savings, leading to low consumer confidence.

“Currently, consumer confidence is below levels seen during the Covid-19 pandemic, the European Banking Crisis in 2013 or even the financial crisis of 2008. This is a major red flag for consumer-based economies and might affect consumer spending negatively as people fear for the future.

“Inflation is driving this lack of confidence and central banks urgently need to get it under control,” says Ackerman.

Commodity prices

Keith Wade, chief economist and strategist at international fund manager Schroders, said in a recent report that the disruption of supply chains and a retreat from globalisation are driving inflation higher.

“The war in Ukraine is already having a significant effect on inflation and activity in the world economy as commodity prices have soared and supply chains have been disrupted. Inflation in the G7 was running at more than 7% in April, its highest for 40 years, and will reach double digits in some countries such as the UK later this year.

Read: Secret to enduring stagflation sends traders to emerging markets

“The conflict also marks a watershed moment as it challenges established assumptions about the balance of geopolitical power in the world economy. This has implications for future alliances, trade and investment.

“In our view, the consequences of Russia’s invasion of Ukraine will reverberate for many years and will act as a further disruptive force on the world economy. The war could lead to a realignment of global powers, and a more regionalised world economy with implications for global supply chains and inflation,” says Wade.

Schroders describes the effect of the war and the potential of closer ties between Russia and China as “another blow to globalisation”.

“The conflict in Ukraine clearly sets the stage for an increase in geopolitical tension as a new world order emerges. In this respect, the risks have risen and hence deal another blow to the globalised model of extended supply chains.

Read: Russia opens trading to some foreign investors

“When making decisions over where to locate production, multi-national companies will be weighing the risk of adverse political outcomes against the benefits of more efficient operations.

“That model [globalisation] has, of course, already come under strain from Brexit, US trade wars with China and the Covid-19 pandemic,” says Wade.

The latter exposed the weakness of far-flung supply chains and remains an issue as China’s zero-Covid policy continues to delay deliveries, even today. The trade war between the US and China has also injected a degree of caution.

“For the UK, Brexit has caused major disruption in supply chains as international firms grapple with the complexities of producing goods across different trade jurisdictions. Meanwhile, climate change acts as a continuing threat in the background with the potential to disrupt supply routes and production facilities.

“Not surprisingly, ‘just in case’ is replacing ‘just in time’ as the guiding principle for firms seeking to make their supply chains more resilient,” says Wade.

There are several options to secure supply of inputs. “Bringing supply chains home would boost domestic activity, but clearly represents a retreat from globalisation.

“The supply chain may become more robust and resilient to global shocks, but security comes at a price. For example, moving production from Asia back to Europe can be expensive. Although the ratio of workers’ wages in the US compared to China has fallen from over 30 in 2000, it was still five times in 2018 (the latest figures available),” according to the Schroders report.

Local employment?

Citadel believes the trend of relying less on a global supply chain might have definite advantages.

“While the situation may seem dire, systemic changes may offer good opportunities for investors.

“Desperation leads to innovation, if you know where to look,” says Ackerman.

“The Covid-19 vaccine race accelerated medical investments and current diversification away from coal is accelerating global green energy investments.

“Locally, a large retail company is doubling its spend with local clothing manufacturers, creating 5 000 new jobs in SA.”

Job creation is of utmost importance in SA, given that there are more than 10 million people actively looking for jobs – currently without much luck.