June 2022 Citi GPS: Global Perspectives & Solutions
© 2022 Citigroup
GLOBAL SUPPLY CHAINS
The Complexities Multiply
In the Citi GPS Global Supply Chains: The Complicated Road Back to “Normal”
report published in December 2021, we examined the multiple challenges that have
afflicted global supply chains. We concluded that supply chain conditions remained
remarkably tight, but we saw reasons for hope that the situation might improve over
the course of 2022.
We expected improvement in shipping and logistics during the first part of 2022 as
seasonal pressures associated with elevated fourth-quarter demand were reversed,
steps were taken to unclog the ports, and oil prices began to moderate. Through the
second half of 2022, more fundamental adjustment in the afflicted sectors —
including semiconductors, autos, and other industrial goods — seemed likely as
rising production gradually cleared backlogs that had accumulated.
But the first quarter of 2022 brought significant downside surprises. The Omicron
variant emerged, which has slowed — and in some regions stalled — any
appreciable improvement in the pandemic. Ultimately, an unwinding of supply chain
pressures requires sustained progress in managing the pandemic. COVID-19 risks
are again flaring with the upsurge of cases in China and the ongoing lockdowns.
These challenges have been accompanied by the eruption of armed conflict
between Russia and Ukraine. While the full implications of the conflict for supply
chains are yet to be determined, what is clear is that it has opened a significant new
chapter in the supply chain saga.
In this report, we update our analysis of supply chain tensions to account for the
extraordinary developments of recent months. We begin by considering five
fundamental macro drivers of these pressures, which we identified in our previous
report. Notably, the lion’s share of these factors remain in play. We then turn to an
assessment of recent supply chain performance and sketch out the unsettling risks
flowing from the Russia-Ukraine conflict, which reflect the pivotal role of these
countries as exporters of commodities and raw materials. We conclude with some
broader thoughts on how supply chains are likely to evolve in the aftermath of this
episode.
Bottom line, we find that supply chain pressures have proved to be more persistent,
and apparently deep rooted, than we had expected even a few months ago. And the
Russia-Ukraine conflict seems to be further amplifying the stresses. Given these
realities, any hopes of near-term improvement in supply chain conditions have been
shattered. The challenges in the months ahead look to be as acute as at any time
over the past two years.
Nathan Sheets
Chief Global Economist, Citi Research
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