The Year Ahead 2022: What a “World of Shortages” means for markets, companies, and the economy

November 22 2021

Ross WalkerChief UK Economist

View bio

Kevin CumminsSenior US Economist

View bio

Peiqian LiuChina Economist. Ranked Top 10 China forecasters by Bloomberg.

View bio

Brian DaingerfieldHead of G10 FX Strategy, Americas

The Year Ahead 2022 Summary Report

PDF (5.4 MB)

Download

Other insights

View more insights

4 minute read

As the global economy has reopened, demand has clearly outpaced the supply of nearly everything from skills and labour to energy and commodities, and big questions remain over the scale and persistence of the disruption in the year ahead. We take a closer look at how long they’re likely to last and the major implications for key sectors, markets, and regions.

Listen to our podcast on what the shortage of everything means for the economy and markets: Apple Podcasts, Spotify, YouTube.

Many sectors globally have been hit by labour shortages over the past few months, problems that have been particularly acute in the US and the UK.

In the US, despite vaccination progress and economic reopening, many would-be workers remain on the side-lines for any number of reasons: ongoing health concerns linked to coronavirus infection; people awaiting retirement; workers focusing on other priorities; and mothers remaining at home to care for children (possibly reflecting a lack of childcare). In fact, one of the biggest factors holding back labour supply is the relatively low participation of women in the US job market. The pandemic has resulted in many women assuming the role of primary caregiver in their households. After the Great Recession, for example, it took a very tight labour market to attract this group of women to re-join the labour force, which leads us to believe their return to work following the pandemic will be slow.

Number of US women who do not want a salaried job and instead maintain families on a full-time basis

Sources: US Bureau of Labor Statistics

The UK is subject to the same supply pressures as other advanced economies, but Brexit adds a layer of complexity. Although we still expect most of the effects of Brexit – weaker investment expenditure, trade frictions and reduced labour market flexibility – to be felt over the medium term, some of the consequences of leaving the European Union are already apparent, and reduced labour supply is among the most obvious. There’s little doubt that net migration into the UK has fallen sharply in 2021 and, in all likelihood, many EU citizens who left the UK in the immediate aftermath of Brexit or during the pandemic are unlikely to return. There’s a clear sense that the UK labour market will not be as fluid as prior to Brexit and the pandemic from now on.

The rise in demand – partly the result of aggressive fiscal stimulus during the pandemic – since economies reopened has far outstripped supply. Resource-exporting countries in Latin America, the Middle East and Africa have experienced a slow recovery. This has led to shortages of raw materials such as precious and industrial metals, coal, and oil & gas, caused acute supply chain disruptions, and pushed prices higher.

As economies continue to reopen and vaccination rates pick up around the world, we expect exports of commodities and raw materials to pick up too. That said, increased production of key raw materials may continue to lag surging demand, which means upside pressure on prices could persist throughout 2022. For example, crude oil inventories are already quite low and they’re likely to remain below pre-pandemic averages over the course of next year. Energy supplies are also subject to a range of geopolitical drivers, including the role of fossil fuels amid the need to cut carbon emissions, and supply management by the OPEC+ group.

Check out the results of our corporate survey on how businesses are addressing supply chain issues, rising inflation, and cost pressures.

A dearth of semiconductors has been among the most noticeable shortages we’ve seen recently, and it may have an outsized impact on the growth rates of many economies. That’s because semiconductors are vital in a range of sectors, and shortages are having a profound impact on the ability of auto, smartphone, and computer manufacturers to meet demand (often to the detriment of sales).

The semiconductor industry is cyclical in nature, and the current upswing in the sales cycle has been amplified by the switch to the pandemic-induced work from home model, which has led to higher demand for electronic devices and increased adoption of smart home appliances. This increased demand looks to be here to stay as many working arrangements have shifted permanently.

Unfortunately, the explosion in demand for semiconductors has not been met by a timely increase in production capacity, resulting in supply bottlenecks for chips. Given that production capacity is slow to come online – it takes 1–2 years to redesign new production plants to meet rising demand), we expect the chip shortage to persist well into early 2023.

Developed markets saw an early pick-up in demand after the initial shock of the pandemic due to the huge fiscal support that was provided to their consumers. By contrast, many emerging markets experienced a faster recovery in production as their governments chose to prioritise the reopening of factories. But this has clearly resulted in increased demand for the shipping and logistics needed for goods to flow from emerging markets to more developed countries.

Congestion at ports, coupled with a mismatch between the supply and demand of containers, has led to soaring shipping costs. By the end of September, global sea freight rates for container shipping were almost ten times higher than in January 2020. Container prices represent a useful proxy for the price fluctuations of imported goods and reflect the impact of logistical shortages in the supply chain. However, whether these cost increases will make their way into prices of final goods largely depends on the pricing power of companies. While the discrepancy between supply and demand for containers will eventually normalise, it looks likely to persist until well into 2022.

For most regions, global shipping times remain elevated – and will for some time

Sources: IHS Markit, NatWest Markets

In addition to higher prices, limited capacity is resulting in slower delivery times around the world, although the problem has been particularly pronounced in developed markets. The most recent set of manufacturing PMI data suggests that this situation is unlikely to ease as we approach the holiday season. In fact, it looks set to last at least through the first quarter of next year – if not longer.

Click here to learn more about how you can make your supply chain more resilient in a post-pandemic world.

It goes without saying that the bottlenecks above are going to have inflationary effects, but their impact will vary by region and sector. Those that experienced faster recoveries in demand, such as the US, have generally witnessed higher consumer inflationary pressure, while those where the domestic demand recovery has lagged, such as China, are still registering relatively subdued price rises. Manufacturing hubs that mainly import raw materials have seen a more rapid surge in producer price index inflation.

But will these effects be temporary? We believe the risk is skewed towards more persistent inflationary pressures, for the developed world at least. Raw material shortages and logistics bottlenecks may ease in 2022, when demand normalises and more countries reopen. Weather-related disruption to energy supplies should also ease sooner rather than later.

However, increasing semiconductor production and shipping capacity to accommodate structurally higher demand may take 1–2 years. The realignment of manufacturing supply chains and labour shortages may last even longer. These supply shortages may feed into higher prices for a wider range of goods and services, pushing up core inflation in the medium term.

Over the longer run, a shift in manufacturers’ strategies to enhance supply chain resilience by building “just in case” rather than “just in time” supply chains may lead to structurally higher production costs and inflation, although this should be a gradual process. What’s more, geopolitical changes that began prior to the pandemic, including Brexit and US-China trade tensions, might also be drivers of inflation over the long term.

Markets and Economy


This presentation has been prepared by National Westminster Bank Plc (“NatWest”) and NatWest Markets Plc and/or NatWest  Markets Securities Inc. (collectively “NWM”) or its affiliated entities (together, ”NatWest”/”NWM”, “we” or “us”)  exclusively for internal consideration by you (the “Recipient” or “you”).  This presentation is incomplete without reference to, and should be viewed solely in conjunction with, any oral briefing provided by NatWest/NWM.  NatWest/NWM and its affiliates, connected companies, employees or clients may have an interest or position in, or deal in, transactions or securities (or related securities or derivatives) of the type described in this presentation and may provide, or be seeking to provide, general banking, investment banking, credit and other financial services to any company or issuer of securities or financial instruments of the type referred to in this presentation. This material may constitute an invitation to consider entering into a derivatives transaction under U.S. CFTC Regulations sections 1.71 and 23.605, but is not and shall not be considered as a binding offer to buy or sell any financial instrument or enter into any transaction.

Nothing in this presentation should be construed as legal, tax, regulatory, accounting, finance, investment advice or other advice to you or any other party, or as a recommendation or offer, or solicitation of an offer,  by us to purchase securities from you or to sell securities to you as defined under US securities law, or to underwrite any of your securities or extend to you any credit or similar financing, or to conduct any such activities on your behalf and is not intended to form the basis of any investment decision. NatWest/NWM are not acting as advisor or fiduciary in any respect in connection with providing this information. Neither this presentation nor our analyses are, nor purport to be, appraisals or valuations of the assets, securities or business(es) of the Recipient or of any transaction counterparty.

This presentation is based solely upon information provided to NatWest/NWM by the Recipient and/or publicly available information. It reflects prevailing conditions and our initial views as at this date which we reserve the right to change from time to time. In preparing this presentation, we have relied upon and assumed, without verification, the accuracy and completeness of all information available to us, whether from public sources or provided by or on behalf of the Recipient, including any statements with respect to projections or prospects of the Recipient and related assumptions.  NatWest/NWM makes no representations or warranties (express or implied) with respect to this presentation, and disclaims all liability for any use by you, your affiliates, connected companies, employees, or your advisers make of it.  Any views expressed in this presentation (including statements or forecasts) constitute the judgment of NatWest/NWM  as of the date given and are subject to change without notice. NatWest/NWM  does not undertake to update this presentation or determine the accuracy or reasonableness of information or assumptions contained herein. However, this shall not restrict, exclude, or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not lawfully be disclaimed. Past performance is not indicative of future performance.

NatWest/NWM transact business with counterparties on an arm’s length basis and on the basis that each counterparty is sophisticated and capable of independently evaluating the merits and risk of each transaction and that the counterparty is making an independent decision regarding any transaction.

This presentation has been prepared in response to a request to provide you with solutions to manage a risk or pursue an opportunity identified by you. This presentation is provided to you on the basis that you understand that NatWest/NWM  is not providing you with any "investment advice" within the meaning of Article 53 of the FSMA 2000 (Regulated Activities) Order 2001 and as a result, NatWest/NWM  is under no obligation to assess the suitability of the information provided in light of your knowledge and experience, financial situation and/or investment objectives. A consequence of the above is that NatWest/NWM  will not provide you with advice on the merits of buying, selling, subscribing for or underwriting (or exercising rights to acquire, dispose of or underwrite) any particular investment instrument. In accepting this information you acknowledge that you have been correctly categorised by NatWest/NWM as a Professional Client for the purposes of the Financial Conduct Authority's rules. As such, you acknowledge that you are capable of interpreting the information provided by NatWest/NWM  and using that information to take decisions as regards the merits of investing in particular investment instruments.

This presentation is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. The information in this presentation is confidential and proprietary to NatWest/NWM  and is intended for use only by you and should not be reproduced or disclosed (in whole or in part) to any other person without our prior written consent. 

Not withstanding the foregoing (but subject to any applicable federal or state securities laws), NatWest/NWM may disclose to any and all persons, without limitation, the tax treatment and tax structure of any transaction contemplated hereby and all materials (including opinions or other tax analyses) relating thereto. IRS Circular 230 Disclosure: NatWest/NWM or affiliated entities do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with us, of any matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

No banking product or service described herein is or shall be considered as being offered by a US chartered bank or covered by FDIC insurance.

National Westminster Bank Plc. Registered in England & Wales No. 929027. Registered Office: 250 Bishopsgate, London EC2M 4AA. National Westminster Bank Plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

NatWest Markets Plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh, EH2 2YB. NatWest Markets Plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is provisionally registered as a swap dealer with the United States Commodity Futures Trading Commission . Securities business in the United States is conducted through NatWest Markets Securities Inc. a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned subsidiary of NatWest Markets Plc. NatWest Markets Securities Inc. is authorised by NatWest Markets Plc to act as its agent for certain kinds of its activities.  

NatWest Markets N.V. is authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten.  NatWest Markets N.V. is a wholly owned direct subsidiary of NatWest Markets Plc. Registered Office: Claude Debussylaan 94, 1082 MD Amsterdam, The Netherlands.

The Royal Bank of Scotland plc and National Westminster Bank Plc are authorised to act as agent for each other.