As European Banks are forced to prop-up the euro, will the U.S be able to swerve a recession? Professor John Manners-Bell reports.
The world is beset with what mainstream media like to call a ‘cost of living crisis’ driven by rampant inflation which is impacting on businesses and consumers alike. The universal response by central bankers has been to raise interest rates in an effort to address these inflationary pressures. However, this approach hides the fact that for many markets the underlying causes of inflation are not the same. Understanding the root causes of inflation is important as it will have a major influence on domestic and global goods flows and hence the development of the supply chain and logistics industry.
For example, in Europe, inflation is largely being ‘imported’ due to the energy crisis related to the supply and cost of natural gas. In the US, the problem is more of a traditional type caused by a runaway domestic economy, fuelled by a $5 trillion government stimulus package. As such, the Federal Reserve’s action to increase interest rates is an attempt to induce a recession (‘demand destruction’) whilst in Europe a recession is an inevitability, whatever fiscal policies are adopted.
European Banks need to prop up the euro
Why should European bankers want to increase interest rates if the economy is already crashing? After all increasing rates will only add to the hardship of indebted consumers and reduce investment by businesses. Partly it is because they don’t have any other tools at their disposal and need to be seen to do something but as well as this it is also an attempt to prop up currencies which have plummeted against the dollar to historic lows. Weak currency makes the import of foreign goods more expensive, especially commodities priced in dollars, such as oil. There is also the reputational damage of a euro trading at less than 1 dollar.
Germany’s industry is being particularly affected by the energy crisis. According to one commentator, manufacturing gas input costs are eight times those of US competitors making many German producers uncompetitive on the world market. The US can rely on domestic supplies and therefore is largely immune to the global forces impacting much of the rest of the world. Many large European users of gas, such as fertiliser manufacturers, have already been forced to shut down creating shortages and price increases not only in Europe but much of the rest of the developing world.
The variance underlying the causes of the economic and fiscal instability is important to the prospects of the supply chain industry. Europe’s domestic logistics sector is likely to suffer significantly from the downturn caused by stagnating manufacturing output, weighed down by energy costs and an inability to pass on price rises to struggling consumers. Exporters will also be hard hit, unable to compete effectively with US and Chinese competitors. Even within the region there will be differences in outlook. For example, France has taken the policy decision to nationalise its largest energy provider, EDF, which allows the government to control prices. Although this may be effective in the short term, cushioning energy costs for a period of months or even years, this will come at enormous cost to the country’s fiscal position which may have even worse repercussions in the future.
The US may avoid a recession
The US is in a different situation. If the Fed is able to achieve a ‘soft landing’, a full scale recession can be avoided. Many US companies still have large cash piles left over from the pandemic and are in a good position to ride out any economic storm without having to make difficult operational decisions such as cutting work forces or investment. Consequently, the country’s logistics industry should be less exposed to the domestic pressures facing counterparts in Europe.
There is also the question of what will happen when China’s manufacturing industry comes fully back online. At present, the government is still enforcing lock downs in many parts of the country due to its zero Covid approach. A return to normality will result in increased economic activity which will drive the logistics and supply chain industry throughout the rest of Asia as well as in China itself. However, it will also mean an increased demand for gas which will only add to Europe’s woes and impact on its competitiveness through higher prices.
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GLOBAL SUPPLY CHAIN INTELLIGENCE (GSCi)