Expect the Global Supply Chain and Inflation to Get Worse | ETF Trends

Omicron is causing the same level of chaos for supply chains as previous variants. China, a country with a zero-tolerance policy regarding COVID infections, is once again having to shutter portions of its manufacturing sector, and Chinese ports are backing up again with workers in short supply due to lockdowns, reports the Wall Street Journal.

Companies with international reach, including Samsung, Volkswagen AG, Nike, and Adidas, are already feeling the effects of production disruptions, and there are major concerns that the global supply chain will be heavily impacted by the widespread shutdowns of the world’s second-largest economy.

“The risk posed by the Omicron variant is that we could take a huge step back in terms of supply-chain bottlenecks,” said Frederic Neumann, co-head of Asian economics research at HSBC. “This time, the situation could be even more challenging than last year given China’s increasingly significant role in global supply.”

Chinese officials have been fighting outbreaks in several areas of China since December, including Tianjin, an eastern port; Xi-an, which is located in central China; and Shenzhen, a major technology hub for the country. There have been city-wide lockdowns and mandatory city-wide testing across the country in recent weeks.

Ningbo-Zhoushan, the third-busiest container port globally, is facing disruptions with confirmed COVID cases in surrounding areas that are affecting warehouse production and the availability of trucks. A delay of trade at the Ningbo port could cost upwards of $4 billion, according to Russel Group, a consulting firm for the supply chain.

The Economic Impact of Omicron in China

There are concerns that China could be ramping up to a nationwide lockdown not seen since the beginning of the pandemic; if so, the global repercussions could be a major setback for the supply chain and global economy. Toyota and Volkswagen have both reported factories and plants being closed in recent days, and with much of the global economy relying heavily on Chinese exports, it could have major impacts and implications for recovery.

The concern is that “over the coming months we’ll experience the ‘mother of all supply chain’ stumbles: an Omicron-driven stall in factory Asia,” said Neumann.

Economists believe that Omicron heavily impacting Asia could have grave implications for the global economy, adding further inflationary pressures and forcing central banks to tighten their monetary policy further.

With markets already reacting to a hawkish Fed and a rising rate environment, further pressures could cause increased volatility. Active management is positioned favorably in volatile times because of its ability to respond and adapt funds to changing market conditions as they happen.

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