Introducing the RSM UK Supply Chain Index: Sustained growth depends on investment

The infrastructure that supports the domestic and global economies has experienced a significant stress test over the past few years.

The triple policy shocks caused by Brexit, the 2017-2020 US-China trade war and the decision to effectively shut down elements of the global economy during the pandemic have resulted in an effective simulation of what deglobalization looks like.

To capture this shift, we have created the RSM UK Supply Chain Index, which provides a near real-time and forward look at the elements of transportation, manufacturing, sales and labour that underscore the manufacturing and service sectors.

Using a linear regression model, we found that our index is statistically correlated with official measures of inflation. The result is a confirmation that supply chain disruptions are largely behind the recent surge in inflation.

An index value of zero is defined as a normal, non-recessionary level of supply chain efficiency. Positive values of the index suggest adequate levels of supply chain efficiency; negative levels suggest deficiencies.

Our composite index incorporates different measurements of the economy:

  • Delivery times, prices paid and inventories in the manufacturing and service sectors
  • Inventories held by retailers, wholesalers and manufacturers
  • Imports of goods
  • The job vacancy ratio

We expect to update the index to capture the changing dynamics of the economy as it emerges from the pandemic.

While fixing the supply chains will require spending on railways and ports, some of which has been earmarked in the government’s latest transport white paper, it also points to the need for realistic trade, industrial and immigration policies.

Disruptions to global and domestic supply chains have resulted in reduced availability and choice for producers and consumers, and those disruptions are the primary catalyst for rising prices not only in the United Kingdom, but also across the world.

The bottlenecks are about more than ships waiting to be unloaded at Felixstowe. The shock to the system began with Brexit in 2016 and then accelerated during the pandemic. Indeed, our supply-chain index shows a clear deterioration from mid-2016, after the shock vote to leave the EU, until early 2019 when there was a sharp increase ahead of the original Brexit deadline as firms stockpiled goods in case of a no-deal. The uncertainty around Brexit was then compounded by the US-China trade war, which hobbled the global manufacturing sector. 

But the source of the problems has now changed. The inability to restock inventories for some goods is now because of production disruptions among the UK’s trading partners still suffering from COVID-19 outbreaks. This comes on top of a supply chain infrastructure ill-equipped to handle a once-in-a-century surge in demand.

The diversion of ships away from Felixstowe because it is too busy might lead to the conclusion that production stoppages among UK suppliers in Asia are not so much the overriding issue as are the problems of moving the freight once it hits the ground.

Indeed, the shortage of truck drivers in the UK has become infamous around the world after sparking a fuel buying pandemic in October. Industry estimates suggest that the UK is now short of about 100,000 HGV drivers, compared to a deficit of about 60,000 before Brexit. The industry is a fantastic example of how Brexit and the pandemic have combined to result in a perfect storm for the logistics industry. Around 15,000 EU HGV driver returned home and have been unable to work in the UK due to Brexit, while around 30,000 HGV tests were postponed due to the pandemic. Either event by itself would have hampered supply chains, but combined, the effect was big enough to cause some supply chains to effectively collapse. 

The limits of public policy

Can public policy play a role in fixing the supply chain problems? Will the disruptions unwind once the public finishes its pre-holiday shopping spree? Or has the pandemic uncovered yet another flaw in the way the economy works?

We would argue a little bit of the former and a lot of the latter.

The only major lever the government could pull that would have an immediate impact on the supply chain shortage is to dramatically ease restrictions on EU lorry drivers coming to the UK. However, it has steadfastly refused to do that and has only issued very limited visas and temporarily eased some restrictions.

We expect the supply chain to continue to be a drag on economic growth and for prices to continue to remain elevated until the supply chain bottlenecks are overcome.

While there was a surge in industrial production in 2021, that was driven in part by the ebbs and flows of the pandemic, as well as by the robust fiscal and monetary policies adopted after the pandemic began. We are now in a different situation where supply shortages have begun to limit growth. Indeed, industrial production has only grown by 0.3% since May and is still about 1.5% below its pre-crisis level. And there is very little the government can do about soaring global energy prices.

Lessons learned

There are three lessons that we can take away from this crisis.

  • Public investment in transport infrastructure has been short-sighted for many decades, especially outside of London and the South East. The government has committed to ‘levelling up’ the regions, but true levelling up will take more than a new railway line from London to the North.
  • If the government is serious about dramatically curtailing immigration, then public policy needs to spur investment in the health and education of the labour force and to invest in research. Initiatives like these can kick start the next productivity boom, and are necessary for the United Kingdom to compete with the rest of the world.
  • Outside of major cities internet connectivity is still woeful. If the UK is to benefit by as much as possible from digital revolution it will be necessary to ensure that all areas of the UK can access high quality digital infrastructure.

The takeaway

The recent supply chain challenges are only partly due to impact of the pandemic. Brexit and decades of underinvestment in transport infrastructure have also exacerbated the problem. As such, the government will need to do more than wait for the impact of the pandemic to wear off. Investment in infrastructure and people will be necessary to offset the impact of lower immigration and higher trade barriers.