Supply chain bottlenecks will hamper recovery from virus says Oxford Economics

Bottlenecks in European and global supply chains caused by the Covid-19 pandemic will significantly deepen the economic crisis faced by EU nations and plunge the bloc into a worse recession than in 2009, according to Oxford Economics, the UK-based global forecasting and quantitative analysis firm. Its latest analysis finds that for the EU, intra-bloc trade is vital and shutdowns will only lengthen the crisis for companies in the region. In response to the global coronavirus pandemic, it has revised down its EU-27 GDP growth forecast from 1.2% in 2020 to -4.8%, a much sharper recession than in 2009. John Payne, economist at the firm, explains that because production takes time to restart following lockdowns, no matter if the lifting is coordinated, there will be significant disruption to EU countries that rely on importing intermediate goods used in their own production. These are typically on the periphery of the EU such as Poland, Czech Republic, Austria, Hungary, Romania, Slovakia and the Nordics. “With widespread lockdowns delivering a major hit to domestic economies, we expect an unprecedented plunge in global activity in the first half of 2020. But a recovery in H2 could be slow if the lifting of restrictions is uncoordinated. That means bottlenecks in industrial sector supply chains could exacerbate other ongoing constraints, such as social distancing, in the industrial sector,” states Mr Payne in the report. “The epicentre of the coronavirus pandemic has shifted from China to Europe, and lately to the US, placing over 50% of the global economy under lockdown. The EU is significantly more integrated into global supply chains than the US and China. Countries outside the block most integrated with EU supply chains are, unsurprisingly, neighbours such as the UK, Switzerland, Turkey and Russia. Mexico and Canada are vulnerable to US shutdowns because they have a high proportion of core intermediate goods imports that come from the US,” continues the report. The US and EU also import a large portion of goods used in production. Extended lockdowns there would prevent a quick restart for exporters from a similar set of economies, plus Ukraine for the EU and Ireland for the US, notes Mr Payne. “Among sectors, the chemicals and pharma category is particularly exposed because intermediate exports from the US and EU combined contribute to over 8% of global (excluding US and EU) sector output. The aerospace industry relies heavily on the US to export the intermediate goods needed elsewhere in production, so it’s similarly at risk,” states the report. The firm points out that the EU is of “huge importance” to global supply chains, accounting for nearly a third of global non-food and non-fuel intermediate goods exports; the equivalent figure for China is just over 10%. More than a quarter of the EU’s total comes from Germany, which reflects its dominant position in automotive supply chains. Much of this trade is within the EU, where lockdowns may not be coordinated but end within in a similar time, explains Oxford Economics. “Since the majority of the global economy is in lockdown, firms’ inability to source key components is currently inconsequential. But a key risk for some firms is that as domestic lockdown restrictions are lifted, supply-chain issues as a result of restrictions elsewhere continue to constrain output, limiting the speed of the recovery,” explains the firm. “The speed of the recovery will be impeded by these supply-chain disruptions. For a period, firms may face supply shortages and an inability to ramp up production if it takes time for companies to get back to 100% capacity. Similarly, if the main end-producer is increasing output slowly, demand for intermediate goods will be sluggish,” concludes the report.

Supply chain bottlenecks will hamper recovery from virus says Oxford Economics

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