In year three of the COVID-19 pandemic, the a slew of challenges remain for global supply chains and economies. Here are three areas to watch.
Supply Strains
Frequent supply chain disruptions aren't going anywhere. The latest is an omicron outbreak in China — sending jitters through global supply chains as manufacturers and shippers deal with local restrictions and lock downs.
The cost of shipping inventory and supplies around the world rose sharply during 2021, although it has recently been cooling off a bit from the surge. But predictions of a further decrease could prove premature, as omicron continues to cause price spikes throughout the global supply chain.
Major strains expected to continue in 2022 include shortages in semiconductors, container shipping and labor for staffing ports and carriers. The rising cost of transportation and labor are also impacting financial institutions and governments all over the world. The result has been a resurgence of inflation.
Inflation
Millennials and Gen Z are unfamiliar with the phenomenon of rampant inflation. The last such era was in the early 1980s, when Ronald Reagan was president. Economists describe inflation as a beast that’s difficult to tame, capture and place back in its cage once it breaks loose.
The Federal Reserve has maintained a low-interest-rate policy for the past decade. Now, in response to rising inflation that crossed the 6% mark in 2021, it’s expected to raise interest rates. At the same time, economists and the Fed face the challenge of distinguishing between real inflation and short-term spikes, caused by the immediate effects of the pandemic and global supply chain congestion. That helps to explain why the Fed has so far focused on keeping interest rates low.
It's unclear how long the Fed will be able to maintain its current conservative position if real inflation maintains its momentum. Interest-rate hikes could stretch into the second or third quarter of the year if omicron continues to place strains on the U.S. economy.
Amazon Pressures
The global pandemic has greatly benefited e-commerce and especially Amazon.com, the industry juggernaut. It accelerated the adoption of online shopping by American consumers by several years. During 2021, Amazon’s financial results grew by around 18% year on year, although not as dramatically as the 37% rate in 2020.
As the nation’s largest online marketplace, Amazon very much reflects the U.S. economy. It, too, is heavily affected by global supply chain disruptions and inflationary pressures. If such challenges continue to affect Amazon’s marketplace, the year 2022 could to be the company’s most challenging year yet.
Amazon will be facing pressures in the upcoming years from a few main friction points. The U.S. government will continue to crack down on Amazon’s perceived marketplace dominance. In addition, global supply chain interruptions challenged Amazon’s sourcing capabilities as well as many of its third-party sellers during 2021. All of them struggled to keep their products in stock on the platform. These supply constraints limit the depth and variety of products on Amazon’s platform, which in turn could cause consumers to look for alternatives in other marketplaces if the trend continues into 2022. One thing is clear, however: third-party Amazon sellers will have to learn the art of Amazon business negotiation to keep their inventory levels in good shape, and their cost structures in check.
Another friction point is how inflation is affecting the competitiveness of the products offered on Amazon. Approximately 60% of Amazon’s marketplace revenue comes from third-party sellers. Most aren’t equipped with the tools and expertise to battle inflation. If they raise their prices on the platform during 2022 to adjust to inflation, and those prices become too expensive compared with other retailers, it will affect Amazon’s ability to stay competitive and maintain its growth momentum over competitors.
The global economy is a complex system that connects dots and lines in many unexpected ways. This interconnectivity will determine much of where things are heading during 2022.
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