Disrupted global supply chains, pandemic-related shortages, lockdowns and geopolitical conflict are leading to a less efficient, higher-cost global economy, says a new report from National Bank Financial (NBF).
According to the report, the events of the past few years —including trade wars, a pandemic, Russia’s invasion of the Ukraine and ongoing lockdowns in China — are leading to a retreat of globalization. Companies are looking to diversify their supply chains and bring production back closer to home, it said, “in order to increase resiliency and reduce reliance on geopolitical rivals.”
However, this shift to developing new sources for raw materials and alternative supply chains “will be very expensive and take many years to complete,” the report said
“While producing goods in multiple locations will eventually increase the resiliency of supply chains, it will reduce economies of scale and add to operating costs.”
NBF suggested that this more protectionist global economy will be tougher on smaller companies in particular.
“Unlike large corporations, many of them do not have the resources to overcome protectionist measures by setting up operations in the world’s largest markets,” it said. “Smaller companies also have fewer financial resources to bid for and stockpile various commodities and components.”
Additionally, this trend may increase the volatility of economic cycles, the report said.
“The return of stockpiling and multi-year deals to lock in materials increase the risk of seeing supply in various sectors swing back and forth from scarcity to overabundance — a problem that just-in-time deliveries had minimized for several decades,” it said.