In early 2022 as Europe and America emerged from the emergency phase of the COVID pandemic, and before the Russian invasion of Ukraine, there was hope that the inflation spike experienced during 2021 would gradually subside as supply chains reopened and readjusted.

The War in Ukraine has changed all that, and by delivering an energy shock that has exacerbated the inflationary spike, it risks embedding inflation within the economy more widely than initially thought likely and perhaps also triggering a recession across all major economies simultaneously. 

The removal of Russian oil from the market through sanctions and the retaliatory Russian cuts in gas supply to Europe are unlikely to be reversed for a considerable period. This will lead to ongoing high energy prices and perhaps also energy shortages which may themselves trigger secondary supply shortages across many productive sectors

Likewise, the Chinese government has vowed to continue its zero-COVID policy for the foreseeable future. This will potentially lead to rolling lockdowns of factories and ports in different parts of the country and cause ongoing supply squeezes in consequence.

This squeeze on the supply side is coming at time of high demand as developed economies emerge from COVID lockdowns, with high levels of employment in most developed economies, accumulated savings among many consumers, and labour shortages across many sectors.

While the classic remedy of central banks such as the Fed and the ECB to inflation is to raise interest rates, and this is precisely what they are doing, the classic antidotes to recession at the business level include increasing productivity and reducing bottlenecks.

Increasing productivity could include increasing output per hour worked or reducing the amount of energy consumed to produce a unit of output. Removing bottlenecks through supply chain realignment for example, speeds up your cash-to-cash cycle and reduces the time, energy and resources required to deliver products and services. If you can achieve these dual objectives at a time of inflation it provides a great opportunity to either increase profit margins or gain market share, or both. It is a golden opportunity!

Furthermore, in a high inflation environment, if you have capital on hand, you may find that investment in productive assets such as machinery, software, energy systems, automation, skills development and so on, offers a much better financial prospect than holding large cash reserves whose value is being whittled away by that same inflation. Even if you need to borrow to invest, while interest rates are rising, they are still historically low and such investments can still provide an excellent return on investment in the right kind of assets.

Of course, we cannot know whether there will be another big shock such as a pandemic, a major global natural or climate disaster or a global escalation in military conflict, but we can act on what is within our control to increase productivity and eliminate bottlenecks. This will deliver benefits to our business and to our customers through inflation, recession, and recovery alike. It will also be good for the planet.

In contrast to the period of inflation that started in the 1970s and endured for many years, and notwithstanding the real challenges of war and pandemic that we are facing in the 2020s, today’s world is very different from the 1970s. Today, digital technology, international trade agreements, financial markets, and regulatory regimes are far more integrated, flexible, and capable of adapting to deliver the productivity gains and streamlining that will be needed to adapt to the ever-changing and turbulent trading environment ahead.

Many of my clients in manufacturing, distribution and logistics services are taking these kinds of initiatives right now, investing in added capacity, strategic inventory and automation technology. If you would like to discuss how I can help you and your business to identify opportunities to increase productivity and remove bottlenecks in your business and supply chain you can contact me directly on +353 86 811 6030 or pdaly@albalogistics.com, wherever you are in the world, to start the conversation.

You may also like to listen to my Interlinks podcast here Patrick Daly Interlinks Podcast (albalogistics.com) or subscribe on Apple Podcasts, Spotify, and other main podcast platforms where there are over 90 recorded interviews on diverse topics related to all aspects of supply chain and logistics with business practitioners from all around the world.