Omicron's threat to global supply chain

Omicron's threat to global supply chain

A ship is seen loaded with shipping containers at the Port of Los Angeles, California, the United States early last month. (Photo: AFP)
A ship is seen loaded with shipping containers at the Port of Los Angeles, California, the United States early last month. (Photo: AFP)

By definition, a supply chain disruption is any event that causes a disruption in the production, sale, or distribution of products. Supply chain disruptions can include events such as natural disasters, regional conflicts, and pandemics.

If you think that supply chain disruption in 2021 was bad, a new round of disruption in 2022 could be at least three times worse. It could even be bad enough to cause a worldwide economic recession. That is because the Omicron variant outbreak is much worse than the Alpha-Delta variant outbreaks. In 2021, the highest daily Covid-19 infection tally was 905,642 cases on April 28. The daily Omicron-led outbreak on Jan 10 recorded 3,281,975 infected cases.

US analysts estimate that Omicron can transmit 2.7 times faster than Delta and the outbreak wave will peak in mid-February. According to the Thai Ministry of Public Health's projection, under the worst-case scenario, Thai Covid-19 cases would peak in March with 30,000 cases per day. A total number of infected cases is not projected.

The World Health Organization warned that, by the end of March, half of Europe could catch Omicron. I am not that pessimistic but I did notice that the Spanish flu of 1918 infected 25% of the world's population. Prior to the Omicron outbreak in late November 2021, about 3.5% of the world's population (about 280 million people) was infected with previous Covid-19 virus variants. If Omicron is as infectious as the Spanish flu, there will be at least 20% more of the world's population waiting to be infected. That is 1.6 billion more people. With "only" 280 million people being quarantined in 2021, world supply was in bad shape. The waiting time for Chinese-manufactured products to reach American consumers increased from 41 days in 2020 to 76 days in 2021. Supply shortages caused product prices to soar resulting in the US inflation rate hitting 6.81% in November 2021. If Omicron should infect 1.6 billion workers and consumers, it's hard to imagine its impact on international supply flow.

The argument that Omicron produces much less severe symptoms and deaths, despite its highly transmissible nature, does not help ease supply chain disruption. If 1.6 billion people are to be infected, even with a low death rate, those workers among them will need to leave work and stay at home in quarantine which will greatly affect production capacity. Even at the onset of a new outbreak, labour shortages from Omicron infections prompted many countries to reduce quarantine periods for essential workers to only three days. If they adhere to a seven to 10-day quarantine period as before, there won't be enough workers in hospitals, nursing care centres, and pharmacies. The problem is three days might be enough for an Omicron infected person to recuperate, but it is probably not enough for them to be virus-free.

In my view, home quarantine and reduced quarantine periods could worsen the outbreak situation. By staying at home instead of in controlled facilities, an infected person cannot avoid close contact with other family members, particularly if they have limited space in their house. A short quarantine period will not guarantee that the infected person is virus-free before going back to work, enabling them to possibly spread the easily transmissible virus to co-workers and whoever they might contact.

Enough on health issues and let us focus on economic issues.

Supply chain disruption has one important effect on economies -- a quick rise in prices. World commodity prices rose 60% in 2021 causing worldwide inflation. If you think the US's November consumer price inflation of 6.8% is disturbing, it would shock you to learn that the US's producer price inflation for the same month was 9.6%. The price situation is not much better in Thailand. While December's Thai consumer price inflation was only 2.2%, the same month's producer price inflation was 7.7%. There is no doubt that inflation in Thailand will continue to rise in the coming months.

To demonstrate the impact of supply chain disruption on prices, one does not need to look further than the recent steep rise in pork meat prices. The Swine Raisers Association of Thailand estimates that the recent swine epidemic has cut the pork supply by half and caused a sharp rise in pork meat prices -- a 30% price jump from last year.

What I am concerned most about in an Omicron-led supply chain disruption is the global petroleum industry. What if the outbreak hits oil fields, oil refineries, and oil transportation networks? These facilities will have to run at a reduced capacity, therefore creating a demand-supply mismatch. Furthermore, when oil prices start to rise on production cutdowns due to labour shortages, countries will start stockpiling oil reserves making the price situation even worse. It is not comforting to learn that the world's top three producers of oil -- the United States, Russia, and Saudi Arabia -- are hard hit by Omicron. These three countries control 40% of the world's oil supply.

Price rises will be followed by interest rate increases and depreciation of currencies. On this point, I would like to mention Turkey which might soon enter an economic crisis. Inflation in Turkey soared from 15% in January 2021 to 36% in December 2021. The swift rise in inflation caused foreign capital to leave the country resulting in a 50% depreciation of the Turkish lira within a year. The sharp depreciation caused even more inflation through domestic price rises in energy and imported products. Soon, Turkey might need to ask the International Monetary Fund for financial assistance as its international reserves are quickly depleting.

You might think that Turkey got itself into an economic crisis because of its high public debt and external debt. Nope. Turkish public debt to GDP is 42% (lower than the 60% to GDP of Thailand) and external debt of 63% to GDP. The culprit is inflation.

Thailand had better watch out for inflation, particularly under the high risk of global supply chain disruption from Omicron. I hope that Thailand will not make the mistakes that Turkey has: that is rapidly increasing government debt to support the economy financed by the central bank's printing of money. The result will be hyperinflation followed by a collapse of the economy. This is my warning to the Thai government and the Bank of Thailand.

Chartchai Parasuk

Freelance economist

Chartchai Parasuk, PhD, is a freelance economist.


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