After plummeting to a two-decade low in November, the RSM UK supply chain index showed some improvement in December. However, labour shortages are still a problem, and factory and port closures in China could reignite supply chain stress.
The index rose 10% on the month to 5.12 standard deviations below long-term normal conditions – a sign that, while conditions are improving, they are still far from normal.
The increase in the December reading was mainly driven by sharp improvements in delivery times and prices paid.
Even though the omicron variant seems to have peaked in the UK, it is still running rampant in other parts of the world. Its rapid spread in December and January will inevitably slow the clearing of supply chain bottlenecks.
The big risk, though, is that global manufacturing centres shut down again as the number of omicron cases rises. China, for example, has a strictly-enforced zero-coronavirus policy and imposes economic restrictions.
There is some comfort to be had from the fact that local manufacturers and multinational businesses are better prepared than they were before the pandemic to address such disruptions. What’s more, the shift in consumer spending from goods back towards services will blunt the impact of any shutdowns abroad.
Perhaps just as importantly, higher global vaccination rates will mean the omicron variant has less impact than delta and previous variants did.
Supply deficiency takes much longer to fix than demand issues do, especially now that the global supply chain has become highly interconnected.
Moreover, economic toolkits that include fiscal and monetary policy are normally used to address lagging demand, so are much less effective in the short run to address the supply side issues. Interest rises by the Bank of England are unlikely to quell inflation, which is being driven by shortages of energy and goods.
Once the bottlenecks start to ease, however, the power of market efficiency and business innovation will help the economy bounce back more quickly.