In this second part of the interview on the state of the global economy and its prospects, we speak with Ludovic Subran, chief economist at Allianz and Euler Hermes, about current global supply-demand dynamics, the short supply in shipping containers, and the resilience of Asian supply chains and economies at large.
Unravel: Can you tell us a little bit about the ongoing global supply-demand imbalance? What is causing it?
Ludovic Subran: There is a lot of mismatching between regions, between sectors and there are a lot of rigidities. A lot of the manufacturing plants closed owing to the pandemic, then reopened. It has happened against the backdrop of very low stocks, very low inventories across the world. We have this just-in-time model. So, when you reopen, you reopen in a very chaotic way. I think there’s been this switch in terms of demand patterns towards more home nesting, more electronics equipment, more demand for hi-tech components, demand for rare earth. I don’t think there is much more demand than before. So, I don’t feel for example, that all of the public money that has been spent is creating more demand than we had before. But the type of demand has changed, and the world was perhaps not prepared for that, because we had for a few months, no visibility whatsoever.
And so, the pandemic paused the just-in-time system. We were six months late to delivering what we were supposed to deliver during the crisis but consumption didn’t stop. Even though people were locked down, they continued to consume. This greatly challenged the just-in-time model.
This being said, I’m a strong believer that there is a speculative part to it too, just like during the 2007 food crisis, when people were buying two kilos of rice instead of one because they didn’t know what the price of rice would be the following day. I’m a bit concerned that behind this mismatch, there is this fear of shortages. A lot of the industries are now really concerned about the future of their production. A lot of the shops are concerned about the future of their inventories. And so, I think people are ordering a bit more.
Unravel: The entire panic buying thing, do you think it’s still happening?
Mr Subran: Yes, I’m sure it is. If you’re in the machinery and equipment sector, for example, since the beginning of the year you had to review your price catalogue five times. So, you definitely think that you should order two containers instead of one, just to make sure that you can continue production. So, there is panic buying and I think this is driving this very strong overshoot. And for good reasons. I think these types of behaviour happen because you have no visibility, because all the price signals are blurred. I’m not blaming people for panic buying, but I’m just saying we need to acknowledge that it is happening. Because when we do our models, for example, we can explain 60% to 70% of the price increase, but there is a good third that is unexplained. And so, for me its micro speculation that is resulting in panic buying.
Unravel: Can you tell us a little bit about the shortage in shipping? What drove it? And are we seeing prices normalise?
Mr Subran: There is this phrase “there is no empty container left in the world”, which is a very bizarre state of the world. If you compare it to the 2007 food crisis, remember that we had under invested in agriculture for 10 years. Therefore, the food crisis happened in a backdrop of very low agricultural productivity. It was similar to what we hear today about pharmaceuticals or semiconductors. I think that we underinvested in container capacity – that’s one reason. Then the question is going to be about container prices, because I think the shipping industry was under invested for so long. So, I expect them to be very rigid with price and not go back to €2,000 for a container from Shanghai to France. There will be price rigidities and going back to pre-crisis price levels may not be that easy, but at least the bulk of it, which is speculation and the mismatch between supply and demand, it should stop sometime in 2022. I think trade prices will continue to be slightly higher than we have seen in the past, because they were very low in the pre-crisis level.
The second is continued consumption. Perhaps container prices were too low before the crisis and the price is too high now. And because of the challenges ahead, especially the decarbonisation of the sector, I think prices will normalise, but I think it won’t be back to the pre-crisis level. I think we’re going to have a markup, from these under investment in capacity, we’re going to have a markup on the necessary investment to decarbonise the sector. And we’re going to have a markup related to the fact that the goods that are transported are higher value, so shippers have the pricing power that they are using.
The question is whether the new prices will stick or recede? Again, I think we’re going to see a correction in the fall of 2022, when things normalise and countries go back to potential growth rates when there is no sense of overheating because of super strong policy mixes around the world.
Unravel: In your view, what are one or two defining impacts of the pandemic on world trade as we know it?
Mr Subran: I think it increased trade awareness because people all this while didn’t think much on where their products were coming from. It was almost as if trade was just happening, and then you suddenly realise that very small things can completely derail trade. The attention we gave to trade was very low. I think for policymakers, but also the regular man on the street, there is a lot more awareness about global trade, trade dependencies, the origins of the products they consume. This is new. It has always been there in some circles. But I think now there is this idea that trade is vulnerable, among a broader share of the population.
The second is clearly, on the policymaker front, this idea that trade policy will have to be smarter than before. There is this idea that it’s not all about prices, but it’s also about goods and their production. People were under the impression that they could manage trade policies just by managing the crises. But this crisis has shown that trade agreements can be very fragile and it has led to a realisation among policymakers that they have to secure strategic supplies. There seems to be this return of an appetite for greater autonomy and self-subsistence, which is very worrying for me and reminds me of the 1970s. There is a low appetite for vulnerabilities, when it comes to global trade, and that leaves us with having to make a trade-off between lowering trade prices or import prices, and sourcing products closer to home for a once-in-a-century pandemic event. Basically the big question is, do you want to manage trade for exceptional times or do you want to manage trade for normal times?
So, I hope the pandemic helps us build contingencies. But I also hope that we won’t manage trade and globalisation like every year is a pandemic because that will have negative consequences.
Unravel: Compared to other regions, how do you think Asia-Pacific has fared with respect to trade and supply chains through the pandemic?
Mr Subran: Asia seems to be more resilient, because there’s a lot more regional trade happening in Asia than in other regions. So, the supply chains were already de facto regionalised. And Asia was, really as a whole, first-in-first-out.
The second factor is that Asian countries have been banking a lot of their business models on trade. Just think about Singapore, Taiwan, South Korea. They are confident about their long-term choices to make trade a massive part of their economic model. And so, they’re ready to do whatever it takes to continue to be competitive. They’re ready to make fiscal and social sacrifices to make sure they can continue to export cheap or high quality – just think about Taiwan with its technological niche, and also Vietnam.
Many Asian economies have focused on trade for long, so I think that they are confident about the resilience of their models and in their ability to be the sole provider of goods the West wants. And I would side with them on that – I wouldn’t feel too threatened by whatever the West is promising to do. But certainly, Asian economies should also continue to develop and support their local domestic markets. And they should make sure they continue to focus on moving up the value chain. The cost competitiveness that some of these countries have is unmatched, but there is this demand for quality, and they really need to continue to move up a bit in the technology-content ladder, tackle sustainability issues better and be more transparent about them. All of this is going to matter a lot more when they look to meet the demand coming from the West over the coming decades.
Unravel: What do you think RCEPs role will be for the region?
Mr Subran: RCEP is a game changer because it’s China’s icing on the soft-power cake. China has been catering to the region for quite some time now, including through the availability of Renminbi and through the Belt and Road Initiative. So RCEP is a way to tighten links and tighten the regional supply chain. We’ve always said that it is one of the strongest trade agreements. Of course, even if slightly, it scares the countries that are not in the agreement.
I personally think the RCEP will be a major growth engine for the region. The big challenge for RCEP is to become this innovation and sustainability platform, beyond just integrating trade and catering to the Chinese middleman that can then re-export. Beyond giving priority access to this regional supply chain, it is very important for those countries that are driven by China’s growth agenda. But I think RCEP is going to be a game changer, if it really is about innovation and sustainability partnership, beyond the pure economics of it, which already are very strong.
Unravel: With subsequent and imminent waves of the pandemic, what do you think will be the impact on trade?
Mr Subran: It’s going to be very sad, because behind every wave there are people who die or get sick. It is really problematic and concerning. It is even more concerning, because of vaccine inequality and vaccine insecurity. The fact that people don’t have access to vaccines, for me is a big issue. Personally, I think it’s one of the biggest challenges of our time. We could solve a lot of this crisis by making vaccine available to those countries that don’t manufacture vaccines or by handling vaccine distribution better.
When it comes to growth and trade, the good news is that each lockdown is affecting growth less than the previous one, because people are getting to know how to live with the virus. So, there is a form of resilience that is growing. Moreover, governments across the world are ready to do whatever it takes. So, on the human side it very problematic, but on an economic side, it is less problematic because we’re less surprised, we’ve built more resilience, more coping mechanisms, and we have more secured government interventions. We may still see temporary recessions, but the economic impact is going to be less than from the first couple of waves because countries are learning how to transition.
Unravel: Very nice way to sum it up, that becoming resilient is key.
Mr Subran: Yes! That’s also one of the reasons why Southeast Asia, for example, was better in handling COVID-19, because they had SARS in 2009. So, they were very quickly moving into wearing mask, maintaining safe distancing. But in many countries in the West, this is particularly hard, as it has been difficult to change behaviours.
Ludovic leads the economic research at Allianz SE and Euler Hermes. Before joining Allianz, Ludovic worked for prestigious institutions such as the French Ministry of Finance, the United Nations and the World Bank. Ludovic also teaches economics at HEC Business School. Ludovic is ranked in the top 100 French leaders of tomorrow; he often shares analyses with clients and the media. He has helped design economic policies in more than 30 countries around the world.