Fighting the inflation | BY Rashid A Mughal

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Fighting the inflation

WORLD presently is passing through extremely difficult times, never seen before in history, mainly due to Covid19.

It is absolutely right to say that 9/11 and now Covid19 has changed the entire landscape of our globe.

But the Covid19 aftermath and the shock waves it generated are much more lethal, deadly and long lasting as is evident from the present state of global economy.

With inflation at a 40-year high and multiple shocks disrupting the financial and business landscape, companies are re-examining business models and developing new strategies for accelerating top line growth, protecting the bottom line and planning for unpredictable exogenous factors.

The COVID-19 pandemic and the war in Ukraine have caused significant disruption to supply chains as well as economic losses.

Supply chains are critical to European growth so solving any issues that impact them is vital to rebuilding economies post-pandemic.

A supply chain reinvention is required to make them more resilient and future ready as a new economic order takes shape.

The combination of COVID-19 and the war in Ukraine has the potential to significantly impact Europe’s economy.

Despite expert consensus being that Europe will avoid recession this year, the war is expected to cause a material deceleration in growth.

During the pandemic, we had already faced significant supply chain disruption and, before the Ukraine–Russia crisis, expected some kind of normalization in 2022 and partly 2023 for specific products.

According to Jean-Marc Ollagnier, CEO of Accenture Europe, resurging demand and precautionary hoarding overwhelmed supply chains, with bottlenecks undermining the rebound in industry.

In Germany, car production in the first months of 2022 was down 32% compared to 2019 due to chip shortages.

Also, transportation bottlenecks have aggravated input shortages and sent costs skyrocketing.

For example, container shipping rates remain 10 times above June 2020 levels and added to the lack of material and breakdown in logistics.

Labour shortage, which prevail across manufacturing, construction and logistics, also pose longer-term challenges.

Europe’s HGV driver shortfall, which has reached 425,000, gives a sense of the problems organizations face.

The pandemic was slowing growth before Russia’s invasion, with disruptions costing major economies €112.75 billion in lost gross domestic product (GDP) in 2021 with inflation climbing in geometrical progression.

A protracted war could lead to an additional GDP loss of up to €318 billion in 2022 and up to €602 billion in 2023, according to Oxford Economics.

This shows how critical supply chains are to European growth. For instance, the automotive industry represents over 8% of the EU’s GDP, and with 80% of its growth expected outside the EU, solving supply chain issues is crucial to the sector and our economies.

The war is exacerbating these three main challenges and hitting economies by pushing up energy prices, impacting energy-intensive industries such as utilities, transportation and freight, and chemicals.

Industries also face interruptions to non-energy Russian imports, including metals used in electric vehicles and airplanes, as well chemicals and fertilizers.

Ukraine supplies Europe with cereals, animal and vegetable products, and oil seeds; exports iron ore; and produces the neon needed to make chips.

The stakes of continued disruption are high, but resolving problems will take time and industries are being hit unevenly.

The characteristic feature of the crisis is uncertainty, with an unpredictable impact on businesses.

To help them prepare, there are three potential scenarios reflecting varying GDP and consumer price index (CPI) rates to compare conditions before the Ukraine War against.

The best case scenario is a controlled impact in which sanctions against Russia do not escalate and could even be scaled back, alleviating disruptions.

Unfortunately, this controlled impact scenario has elapsed. Commodity prices would return to pre-war levels, confidence currently at rock bottom will increase and investment plans and spending will resume.

A second scenario, which is the current baseline, foresees an ongoing impact of disruptors in which the supply chain of key commodities remains volatile throughout 2022.

Jobs would continue to be created, with employment increasing by 1% in the UK and Germany, and 0.5% in France by 2023.

Under this scenario, select countries would impose an oil and gas embargo on Russia and commodity supply shocks would sustain a rise in prices.

Consumers would cut back on non-essentials and businesses would prioritize efficiency.The worst-case scenario would be the war extending into 2023.This would have a protracted impact, with 2.8% of European GDP growth shaved off pre-war expectations this year to bottom out at 1.1%, and further stagnation next year.

Inflation could increase to 7.8% before retreating in 2023. This situation envisages a wider oil and gas embargo leading to structural supply disruption, with commodity prices staying high and volatile into 2023.

Sustained price rises would hit consumer spending, depressing confidence and growth. The time it takes to mitigate supply chain challenges and the associated costs will vary.

In the worst case, it will take 24 months to ease disruptions in the supply chain and could cost up to €920 billion.

Supply chains drive European growth, yet operating models are not equipped for uncertainty.

This Ukraine–Russia crisis will have a significant impact as we are looking at more disruptions for longer; the severity will need to be assessed for each scenario but all of them will require a more fundamental supply chain reinvention around security of supply, energy transition and the labour market, and a different level of agility, to address the emerging economic landscape.

The key is investing in leading-edge technology that enables resilient, relevant and sustainable supply chains – from digital twins and analytics to control tower algorithms.

The cloud will also be critical, providing vast computing power in a cost-effective, flexible and sustainable way.

Nothing short of reinvention is required, as a new economic order takes shape amid an inflationary environment, increased regionalization, energy transition and a tight talent market.

Coming to Pakistan, the situation is getting from bad to worse with every day passing. Pakistan currently is indebted to the tone of $250 billion and more recently the rains and flooding have multiplied our challenges and compounded our vulnerability.

The truth is that we are surviving on foreign loans and the country is being run on adhoc basis without a long term debt free vision and sincere and honest commitment for managing our economy according to ground realities.

—The writer is Former Civil Servant & Consultant: I.L.O and I.O.M. The writer also contributes to Migration Policy Institute, Washington and Migration Source, Europe, presently living in US.

 

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