Supply Chain Pressures Will Dominate 2022, But Equilibrium Is Coming

In short:

• This year will bring unexpected twists and turns that will require continued agility, resilience and adaptability in supply chains.
• Economic markets and specifically inflation, geopolitical and trade risks, and the changing global health situation will all impact supply chains.
• The supply chain is slowly moving toward equilibrium, but you will need to carefully navigate conversations with fellow business leaders in the meantime. 

Last year around this time, I wrote a blog post titled, 2021: Our Mirror Year, in which I cautiously heralded a return to economic growth and the potential for a new Roaring ’20s. While the long-term scenario may still arc in that direction, this year’s assessment is admittedly more clear-eyed realistic than optimistic. So where do we go from here? Let’s consider this through the lens of economic markets, geopolitical/trade risks and global health.

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Economic Markets

Multidecade-high goods-related inflation has proven durable heading into 2022, with the U.S. Producer Price Index approaching 10%. Employers in the much larger services industry have initiated a potential wage-price spiral through pay raises granted in 2021 and planned for early 2022. The response? Central banks in most developed markets, including the U.S. Federal Reserve, plan to raise borrowing rates in the near term and start pulling out cash flooded into financial markets through previous bond purchases. Monetary interventions have a lagging effect, so constraints and inflation may worsen before reversing course. 

Industries that require large, multiyear investments to boost capacity (e.g., semiconductors) may see excess supply come online simultaneous to slowing demand. Further, as 2021 results start becoming the baseline for comparison, the combined effects point toward economic contraction. The best case might be a soft landing engineered by central banks and occasional fiscal intervention.

Geopolitical/Trade Risks

One-hundred-thousand Russian troops on the Eastern Ukrainian border and unpredictable regimes in Iran and North Korea aside, there are plenty of other geopolitical and trade risks looming that could tie up global supply chains. One year in, the economic fallout from Brexit is coming into sharper relief, including additional red tape tied to international border crossings, dislocated labor markets and anemic trade growth due to less favorable tax and tariff rules. 

The biggest X-factor for 2022 is, of course, China. Continued pressure on Taiwan, expansionist moves in East Asia and internal pressure on corporations to support the government’s “common prosperity� goal will certainly have spillover impacts on corporate supply chains serving these markets. China’s moves to corner markets for key minerals feeding the high-tech and electric vehicle markets, as well as continued development of a self-contained Chinese high-tech industry, will put pressure on other players in those industries. 

The broadest near-term impact on supply chains will likely come from China’s health policies. The Chinese government’s zero-Covid playbook, while draconian and highly disruptive to its citizens and the broader economy, will be difficult to abandon. In the near term, the shift toward living with the virus in an endemic state will likely prove too unpredictable for China’s policymakers to adopt.

Read more: Your Ultimate Guide to Supply Chain Management

Global Health 

On this front, the path of the COVID-19 pandemic has many potentialities. One of the more likely scenarios is that it becomes endemic, making it the fifth coronavirus to permanently establish itself in humans, alongside four “seasonal� coronaviruses that cause relatively mild colds and have been circulating in humans for decades or more. Studies of these other seasonal varieties have shown that while they don’t mutate at the pace of other viruses such as influenza or HIV, they do mutate fast enough to reinfect those infected in prior waves (e.g., last year’s variant). On a more positive note, these new variants would likely be mild enough to spur hospitalization and death rates more in line with the common flu. Once governments and companies loosen stringent quarantine rules in line with lower infection risks, many of the pandemic-driven disruptions we've seen in sourcing, manufacturing and logistics will resolve.

Moving to the endemic stage will likely also require sufficient global immunization rates and maintaining health and safety protocols in the period during which COVID-19 is still highly contagious and virulent. Efforts in place to develop and release “pan-coronavirus� vaccines to convey immunity across several variants of the virus would further hasten the move toward an endemic state. 

One thing is certain: 2022 will bring unexpected twists and turns that will require continued agility, resilience and adaptability in supply chains. While the two-year journey to get to this point has been exhausting, further diligence is required. Business leaders are telling us that their boards and executive committees have supply chain disruption fatigue and want to know when the pain will end. As a community, we’ll need to navigate our own soft landing as markets move back toward equilibrium. 

This story was originally published on the Gartner Blog Network.