Executives remain optimistic about the global economy at the close of Q2, but not every region is benefiting equally from Covid-19 vaccination rates and re-opened businesses. IPC has raised its outlook for the United States, Europe, Mexico, Australia and Taiwan but notes Japan, India, Indonesia and Turkey continue to struggle.
A recent McKinsey survey likewise found spotty recovery. Executives in developed economies now report much more positive views than their counterparts—a reversal from the first year of the pandemic—as well as new threats to growth. As the pandemic recedes as an outsize and largely universal risk to the economy, respondents believe that inflation and supply-chain disruptions are emergent.
Supply-chain interruptions pose a greater risk to company growth than in past polls, McKinsey found. These disruptions now tie with weak customer demand as the most-common risk to expansion, cited by 28 percent—and up from 16 percent to 19 percent earlier this year. Inflation has also risen in the ranks: 28 percent of respondents raised concerns, up from 12 percent in March.
On average, though, responses show that the pandemic remains a much bigger threat.
In North America, respondents most often cite inflation as a risk to growth (45 percent), followed by supply-chain disruptions, domestic political conflicts, and rising taxes. In Latin America, respondents cite domestic political conflicts more than the pandemic (43 percent, versus 32 percent).
Prices paid by manufacturers have been steadily rising, according to the Institute for Supply Management, and these costs are largely being passed on to customers. With everything from raw materials to semiconductors in short supply, procurement departments are buying what they can even at premium prices. This includes electrical components, electronic components, liquid-crystal displays, precious metals, printed circuit boards and semiconductors.
Ocean freight rates have skyrocketed, according to cargo marketplace Freightos. Importers with annual contracts may be moving some containers at contracted rates, said one logistics provider, but “at the moment, about 90 percent of our cargo is moving at premium rates. There are indications that rates to the East Coast will likely reach $18,000-20,000/FEU [with premiums] in early July.”
That’s nearly 10x higher than the same time last year, the provider said.
Despite price hikes, worker shortages and logistics backlogs, the pandemic's retreat is heightening confidence in the global economy. Still, businesses greatly underestimated the impact of supply chain disruptions at the onset of the coronavirus and the semiconductor shortage caught many industries by surprise. What's driving the current optimism?
“Rather than headwinds, I’d say manufacturing is facing an obstacle course,” said Tim Fiore, chair of the ISM’s manufacturing survey committee. “There are shortages everywhere – materials, labor, logistics capacity – but there is still great demand with no end in sight.”
“I’d much rather be facing the problems of too much demand,” he added.
Even with supply constraints, electronics-reliant industries have managed to grow, IPC reports. Auto production increased 5.7 percent in May as some output that had been stymied by shortages resumed. Production, however, remains 4.5 percent below prepandemic levels.
Production in the information processing and related equipment sector increased 1.8 percent during the month. That sector is up 11.2 percent over the last year and 11.8 percent from two years ago, according to IPC. Defense and aerospace are the only industries that declined, by 0.4 percent.
McKinsey reports unemployment concerns are ebbing on average—even in Europe, where since September 2020 respondents have been much more likely than others to expect rising unemployment. Overall, executives expect that their workforce sizes will grow in the next few months, while 74 percent forecast that company profits and demand for their companies’ offerings will increase in the next six months.
However, IPC notes that businesses have been unable to fully staff, and even with lucrative hiring incentives, jobs remain open. The quit rate — a proxy for worker optimism — is very high. This will make it difficult, and expensive, to hang on to existing workers.
Overall, though, executives’ sentiment about their home economies continues to brighten. Seventy-three percent of McKinsey respondents said that conditions in their own economies are better now than they were six months ago, up from 53 percent in the previous quarter. In Europe, respondents were three times more likely to report improvements than in March.
Respondents also said that their own companies’ prospects continue to improve. On the demand front, this is the largest share to predict an increase since April 2009.