What to expect in 2024 - How inflation will impact supply chains

According to the Organisation for Economic Co-operation and Development (OECD), the global economic growth is “expected to remain weak” in 2024, with projections indicating it will be lower than in 2023. The aftershocks of the pandemic, geopolitical conflicts and increases in cost of living, have all contributed to the slowing of the growth in the global economy. As the International Monetary Fund (IMF) succinctly put, “the global economy is limping along, not sprinting” which confirms the challenging times ahead.

Furthermore, alongside low global economic growth, the world continues to see the presence of persistent inflation, which is projected to remain until 2025 before returning to pre-pandemic levels.

Looking to the future, it’s hard not to assume more turbulence may be on the way. With change ever-present on the horizon, including new shifts in technology, hints of protectionism and regionalisation, and growing concerns with how climate change will impact economic growth, the hope of inflation falling back to pre-pandemic levels of growth may not be feasible before 2025.

The current inflation situation

When discussing inflation, two types are usually at play: headline inflation and core inflation. These two different measures are utilised when analysing and comprehending changes in the overall price level of goods and services in an economy. They serve different purposes and provide insights into different aspects of inflation.

The main difference between headline inflation and core inflation lies in the inclusion or exclusion of unpredictable components like food and energy prices. While headline inflation provides a comprehensive view of overall price changes in an economy, core inflation focuses on the underlying, more stable inflation trends. Both measures have their unique uses and play a role in informing economic policy decisions.

According to the Interim Economic Outlook from September 2023, headline inflation has been on the decline in line with energy and food prices returning to more stable levels since the Russia-Ukraine conflict began. However, this is not to imply that the conflict triggered current inflation rates. Prior to the conflict, there was underlying inflationary pressure, especially in the USA. This pressure was created by strong expansionary fiscal policy during the pandemic, combined with a strained supply side, characterised by issues pertaining to production and materials, and delivery delays.

However, despite prices beginning to return to stable levels on energy and food prices, costs remain above central banks’ target in many countries.

Core inflation remains driven by the service sector, with tight labour markets resulting in central banks in many countries needing to maintain their restrictive stance on monetary policy. Furthermore, overall inflation could persist through compounding disruptions to energy and food markets, and slower recovery from the pandemic in China, resulting in slower global economic growth.

Global growth in 2024

Like sore muscles after a marathon, global economies need time to recover, and can be impacted by earlier issues. Growth in 2024 will not be as strong as seen in the past year. In a recent report, the IMF warned of stubborn inflation with visible divergences appearing on the horizon. More keenly felt in “advanced” economies versus emerging and developing economies, the way back to no inflation is different for each. Whilst the McKinsey’s global economic survey sees geopolitical instability and inflation are the most commonly cited risks to the growth of global economy, some countries are predicted to be better positioned for the coming year.

Last year’s commodity issues and subsequent price shocks are a key link to current inflation and economic activity. Linked to the Russia-Ukraine situation, aftershocks continue to persist, with Europe needing to find alternative energy import solutions in response to boycotting Russian energy imports, but also globally, as Ukraine’s position of being the bread bowl of Europe, was shaken and threatened to increase world hunger. The domino effects of these situation brought commodity price shock, driving core inflation in the EU.

For North America, specifically the United States, core inflation was linked to a tight labour market. Though having loosened a bit, this remains tight and the current resilient demand will make the path to back to the target of 2% inflation challenging. This means that economic growth in the country is not expected to be better than what was seen in 2023. Geopolitical issues remain at the forefront in the Euro area, positioning economic growth to meet hurdles and be lower than 2023 as well. Asia continues to fuel global growth, with the region projected to see faster disinflation, and a large share of global growth in 2024 is expected to continue to come from the region.

According to the Asian Development Bank (ADB), domestic demand has played a key role in continuing Asia’s growth. ADB credits the “reopening of China, rebounding tourism, resilient service sectors, healthy money transfers in the region and stable financial conditions” with supporting economic activity in the region. This is supported by IMF, who noted that “strong consumer spending supported growth in Asia’s three largest economies” in 2023, attributing this to re-opening of China and subsequent recovery with pandemic restrictions lifting. Japan and India also had stronger-than-expected growth in the first half of 2023. Again, this is posited to be connected to “[with] pandemic restrictions lifted, demand in these economies was bolstered by consumers running down savings accumulated during the pandemic, leading to notable strength in the services sector.”

However, despite this, there are signs that the economic growth seen in Asia is slowing with ABD forecasts growth in South Asia and Southeast Asia 4.8% for 2024, and inflation in developing Asia with a meagre decline from 3.6% in 2023 to 3.5% in 2024. IMF published their prediction of economic growth in Asia and the Pacific to 4.2% in 2024, instead of their earlier prediction for the year at 4.4%.

The OECD connects this to the weaker-than-expected recovery China and monetary policy becoming more visible with lowered global growth in 2024 (comparative to 2023) and worries that a sharper slowdown in China could be a key reason global economic growth could slow further. The IMF and ABD both point at China’s weakening property market and subdued external demand as a cause in the slowing of the Chinese economy from the economic growth from 5.4% in 2023 to 4.6% in 2024. The same is also impacting economies in Southeast Asia and Japan.

Further, the ADB highlights the need for a close watch on wide-ranging impacts of El Niño on supply disruptions and food security related to it.

Impacts of inflation on supply chains

As inflation persists, it can cause ripple effects in supply chains causing logistics costs to rise, which in turn can lead to more inflation and increased costs. Furthermore, inflation can result in loss of consumer purchasing capacity.

Pressure on global supply chains have eased as inflation has lowered, but global trade remains relatively weak. This may be alleviated more as the Chinese economy and recovery in global economic growth overall grows, but geopolitical tensions will most likely continue to add constraints to supply chains in the coming year.

Labour shortages in advanced economies persists, and shortages in logistics and transportation, such as truck driver shortages in the US, started during the pandemic, continue to be felt today. working with a logistics partner that has capabilities of end-to-end logistics can help circumvent some of these issues, but overall, feeling the impact of labour shortages may not be avoidable.

Rising costs, including rising energy prices, and rising costs of materials, can also act as a supply chain challenge in the coming year. High prices can lead to shortages and heightened prices for consumers. Additionally, with the costs of materials, energy and labour possibly rising in the coming year, the cost of manufacturing, storing, and moving goods could also rise, putting further pressure on margins.

Heightened frequency of volatile weather patterns, like extreme heatwaves and droughts, can also impact logistics, which in turn can make it more difficult to mitigate inflation impacts.

What can businesses do in the face of inflation?

Despite indications that inflation will persist and subsequently impact supply chains, there are steps companies can take to soften the impacts:

1. Bringing diversification into supply chains

Companies should consider strengthening their supply chains through diversification. By ensuring that they have multiple material sources, increase production centres, create hubs closer to market, enhance and expand their supplier relationships and invest in logistic service provider relationships, they can fortify their overall supply chain and add mobility and flexibility when hurdles appear.

Hybrid supply chains will help alleviate some of the worst impacts of inflation, be they lowered consumer buying power in regions or heightened labour shortages.

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2. Utilising data analytics

Having a digital overview of the supply chain allows companies to better consolidate and understand inventory levels, whilst also minimising costs on unnecessary storage and having overall better inventory management. Furthermore, by implementing a digital supply chain, companies can circumvent hurdles and challenges to their logistics moves in a timelier manner. They can speed up and slow down, based on real-time demand, in challenging times, like inflation, with overview of their supply chains.

3. Embracing technology

Adaption is the key to resilience, especially in the case inflation. New technologies, like AI, can help companies reduce uncertainty and streamline processes. Furthermore, technology like 3D printing and robotics allow companies to redistribute skillsets where needed.

AI can further help with forecasting for supply chain management, consolidating data and utilising it to predict what outcomes and eventualities may be hiding around corners.

4. Partnering with the right logistic service providers

In challenging and changing times, working with the right logistics partners can make all the difference. Working with an integrated end to end supply chain partner can help you create the supply chain solutions you need, versus giving you a standardised one-size fits all.

Collaboration can cultivate flexible supply chains that can adapt to changing landscapes. Developing and enhancing contingency plans, infusing resilience into supply chains and working with a logistics partner who can help forecast upcoming trends, and thereby minimise impacts to operations.

What lies ahead in 2024

Despite hopes that inflation would no longer be an issue in 2024, predictions indicate otherwise. With the ECB choosing to keep rates at or near 4% throughout 2024 to bring inflation down, and both the OECD and IMF predicting that global economic growth remain sluggish throughout 2024, inflation is, stubbornly, here to stay.

Whilst Asia has acted as the furnace for global economic growth since the pandemic, signs indicate that this may slow in the coming years.

However, the outlook is not all drab. Economic growth has shown to be resilient, even in the face of geopolitical turmoil and shifting consumer engagement. Minimum wage in the European region is expected to rise, giving consumers stronger buying power. Key economic players like Goldman Sachs strongly believe that, economically, 2024 is going to be a glass half-full, rather than half-empty, with many large economies avoiding recession. Economists from Allianz also see some brighter spots. Bain and Company see the world beginning to “step out of the woods” and McKinsey sees positive outlooks from survey participants in their “Global Survey”. Others, like Fitch Ratings, warns that if geopolitical insecurities develop further, it can hamper economic growth with heightened oil prices.

So, what does this mean for supply chains? The above paints a picture of a continued need for resilience, flexibility, and partnership. Whilst much can change in the coming period, companies can fortify their supply chains by working closely with their supply chain partners, finding ways to weave even more agility, endurance, and connectivity into their supply chains, and find solutions that fit their needs, when and how they appear.