MORE SUPPLY, LOW DEMAND

WITH VACCINATION NUMBERS RISING, SUPPLY CHAIN BOTTLENECKS ARE LIKELY TO EASE, IMPROVING OUTPUT. THE CHALLENGE IN 2022 WILL BE TO KEEP DEMAND HIGH TO ALLOW INDIA TO RETURN TO THE PRE-PANDEMIC GROWTH PATH

- NEELKANTH MISHRA

The waves of the Covid-19 pandemic, which triggered a global economic recession in 2020, have continued even as 2021 ends. The Delta variant continues to cause much destruction of life, and has forced nearly every country to accept that Covid-19 may never go away. We should know in a few weeks how severe infections from the new Omicron variant can be, and how long the wave lasts (early evidence gives some cause for cautious optimism), but the threat of yet newer variants lurks on the horizon. Irrespective of these challenges, it looks like 2022 could be a very different year for the global economy than 2021.

As restrictions on activity eased in 2021, consumer demand rebounded. The boost from fiscal transfers, particularly in the US, was so strong that shortages emerged in everything from port capacity and ships to cellphones, toys, shoes and equipment. Continuing production disruptions, as fragmented supply chains struggled with the lack of small but critical components like semiconductors, clogged shipping routes, and sporadic breakouts of infections in manufacturing locations exacerbated the shortages. This prompted hoarding by consumers as well as supply-chain intermediaries, further worsening the apparent demand-supply gap and pushing up prices. Towards the end of the year energy prices rose, as global demand recovered, but suppliers of coal, gas and oil, which had mothballed production capacity due to nearly two years of depressed demand, had not yet restarted operations in full swing. In the US, large cash handouts to households also tightened the labour market more than the level of output would warrant, which was likely an important factor in inflation reaching multi-decade highs.