In a new paper, we estimate that euro area manufacturing output in the fall of 2021 would have been about 6 percent higher without the supply constraints. Based on the historical correlation between manufacturing and overall production, we estimate that gross domestic product would have been about 2 percent higher, which is equivalent to about a year’s worth of growth in normal pre-pandemic times for many economies. European.
The drag on production was greatest in countries where manufacturing firms operate at the lower end of global value chains and rely on highly differentiated intermediate inputs. Key examples include countries with large auto sectors, such as Germany and the Czech Republic, where manufacturing output would have been up to 14 percent higher.
Supply constraints also played an important role in driving producer price inflation in the euro area, but so did strong demand. The manufacturing component of producer price inflation was about 10 percentage points higher relative to the pre-pandemic era in the first three quarters of 2021. We estimate that supply shocks can explain about half of the increase in price inflation for manufactured goods. The rest is mainly explained by higher demand.
Supply disruptions had a minor impact on underlying consumer prices (inflation excluding energy and food prices). This measure of inflation was only about 0.5 percentage point higher over the same period due to supply constraints on manufactured goods than it otherwise would have been. This smaller effect is not surprising because goods represent less than half of the consumption basket. Services prices, which account for more than half, are less sensitive than goods prices to manufacturing supply shocks.
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Problems could persist
Globally, we find that up to 40 percent of supply constraints in manufacturing can be attributed to lockdowns, which should only have transitory effects on inflation. Ditto for severe weather and industrial accidents that hampered microchip and car production in 2021. However, other drivers of supply constraints, such as labor shortages (which account for up to 10 percent of global manufacturing supply constraints) and aging logistics infrastructure, could have more persistent effects on supply and inflation than closures.
Late last year, industry insiders expected auto supply shortages to largely dissipate by mid-2022 and bottlenecks to be wider by the end of this year. Omicron has injected new uncertainty. Europe and China have imposed new restrictions and more disruptions could follow. Overall, supply disruptions could last longer, possibly into 2023.
political priorities
The first line of defense is to address supply bottlenecks directly with regulatory measures where possible, for example by accelerating the licensing of transport and logistics workers, temporarily easing restrictions on port operating hours , streamlining customs inspections, relaxing immigration rules to alleviate labor shortages. , and require practices that limit the spread of the virus and protect the health of workers.
Fiscal measures must also be actively implemented to alleviate bottlenecks and prevent permanent damage to potential production. Broad-based support from aggregate demand at this time could intensify bottlenecks and increase inflation with limited impact on output and employment. Instead, support must be well targeted.
For example, it remains important to preserve jobs that will be viable once bottlenecks are removed (such as skill-intensive manufacturing jobs affected by shortages of intermediate inputs). Equally vital is ensuring a recovery in the labor supply by removing barriers to work (expanding reliable child and elder care, for example) and helping retrain workers in newly needed skills.
The prospect of protracted supply bottlenecks poses challenges for policymakers, namely sustaining a still incomplete recovery and ensuring output catches up to its pre-pandemic trend, without allowing wages and prices to fall. shoot up. Keeping medium-term inflation expectations stable despite temporary spurts in inflation, including due to supply disruptions and rising energy prices, is key to managing this trade-off.
Despite the rapid contraction of labor markets in the euro area, recent data and historical precedent suggest that wages will rise only moderately and therefore we expect inflation to fall slightly below the European Central Bank’s target once the pandemic subsides. The ECB has rightly decided to maintain an accommodative monetary stance until its medium-term inflation target is met, while retaining its flexibility to adjust course if high underlying inflation turns out to be more durable than expected.
In general, to anchor inflation expectations to target rates, it is critical that central bankers continue to communicate how they will react to inflation and other economic data, including movements in inflation expectations, and signal their willingness to respond quickly to any significant change in the medium. long-term inflation outlook.
The more successful targeted regulatory and fiscal measures are in alleviating supply bottlenecks, the less likely it is that policymakers will be forced to reduce aggregate demand and economic growth to contain inflation.
* The article was written by IMF Chief Kristalina Georgieva in conjunction with Oya Celasun and Alfred Kammer and published on the IMF blog under the title “Supply Disruptions Add to Inflation, Undermine Recovery in Europe”. add to inflation and undermine the recovery in Europe).
Source: Ambito
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