Global supply chain fragility: Five trends and their impact on the global economy

July 2024

The healing of supply chains was one of the primary drivers of slowing inflation last year. A critical issue for 2024 is whether they will continue to heal and bring down goods inflation. Supply chains are transforming in the face of global fracturing and frequent disruptions; that transformation will mean more fragile supply chains for the foreseeable future. This article looks at five key trends that are shaping supply chains’ impacts on the global economy in 2024:     

1. Increased focus of central banks on supply chain operations: Pandemic-era disruptions of supply chains made it evident that supply chains have become a potential source of inflation for the global economy. Though the jury is still out as to how much supply-driven inflation will factor into central bankers’ decisions, several officials from the Federal Reserve, the European Central Bank and the Bank of England have begun to discuss supply chains and their role in driving inflation. Supply chains and their operations will be more closely scrutinized by central bankers. We have raised our expectations for the Federal Reserve’s terminal rate to 2.875%, as well as other central bank’s terminal rates, on the expectation that supply chains, combined with demographics and demand components, could put a floor under inflation. 

2. Transportation flexibility: Supply chain managers are emphasizing flexibility in their logistics, rather than in their sources of supply. For example, the Baltimore bridge collapse had a significant impact on maritime and trucking logistics. The spike in congestion following the tragedy had doubled or tripled some truckers’ route times as there are few alternatives to going through Baltimore. To mitigate the impact, truckers were permitted to work longer hours while waiting for the trucking channel to be restored; rail companies ran more trains between Baltimore and New York; freight forwarders added more capacity and the Ports of Virginia and New York absorbed diverted cargo. The need for flexibility cannot always be met when we struggle to ramp up capacity. Air carriers are expecting a record-breaking year given the disruptions in maritime shipping and the growth in demand for de minimis shipments from e-commerce platforms. Cargo commitments for airlines operating from Asia to the US and Europe are already tight; air cargo traffic is expected to grow 5% in 2024. 

3. A new operational norm for maritime: The Red Sea shipping crisis and the increase in shipping around the Cape of Good Hope have spurred companies to preempt disruptions. Increased costs from disruptions are being baked into maritime shipping rates at a faster pace than in the past. The supply chain disruptions from both the 2003 SARS outbreak and the Covid-19 pandemic took over a year to absorb; the Red Sea shipping costs took only a few weeks before total global maritime capacity was cut by about 15%. New rounds of tariffs from the US on products like semiconductors and electric vehicles prompted a rush of imports to stock up under the wire. Spot maritime rates rose 50% month-over-month in May as importers rushed to stock up on affected products and get orders in early for the holiday season, both increasing goods demand from China. 

4. More frequent disruptions: 2024 will continue to be a year of more frequent disruptions to supply chains from labor, geopolitics, cyber attacks and climate change.

• Disruptions have become more frequent from labor strikes. Potential longshoremen strikes later this year in the US on the East Coast and Gulf ports, as well as ongoing farmers’ strikes in multiple regions have added to capacity issues. 
• Geopolitical conflict, particularly in key corridors or pinch points of supply, is an ongoing risk. The conflict in the Middle East has led to the ongoing Red Sea shipping crisis.
• Cyber strikes have risen in frequency; annual monetary damages as reported by the FBI’s Internet Crime Complaint Center rose to $12.5 billion in 2023, a 21% increase from 2022. That compares to just $3.5 billion in 2019 prior to the pandemic. 
• Damages and disruptions from weather-related disasters remain at the forefront; ongoing disruptions continue from droughts, fires, flooding and La Niña. 
• The 2024 hurricane season will likely be “one of the most active on record” with 25 named storms and 12 hurricanes forecasted. 

5. United States-Mexico-Canada Agreement (USMCA) review comes into focus: We have seen a growing trend of supply chain realignment toward closer geopolitical allies (“near-shoring” and “friend-shoring”) in the wake of the pandemic disruptions and the Russia-Ukraine war. Mexico has been the clear winner in the race to secure US supply chains, but the 2024 election year will be key to learning the fate of these investments in Mexico as they could be affected by the USMCA free trade deal’s sunset review on July 1, 2026. If one or more of the three parties does not renew the agreement in 2026, that will kick off the process of conducting joint reviews every year, potentially accelerating toward a 2036 expiration. Sectors that require significant cross-border investment, like vehicle and semiconductor production, are heavily impacted by this uncertainty. All three countries will have different government leaders at the table for the 2026 meetings. The US presidential election in November is particularly influential; the US will likely have the largest sway in the review process, which makes who the president is sitting at the negotiating table crucial.