The Supply Crunch

In this video we look at the economics of the supply crunch affecting many countries and especially the UK.

Keeping up to date with topical economics news stories is a great way of adding application to your exam answers. The supply crunch is one of the biggest stories and issues facing the UK at present.

What is a supply crunch?

A supply crunch describes factors causing a fall in market supply of key components, raw materials and (eventually) finished products at a time when demand is rising. These supply chain problems lead to product shortages, rising costs and an increase in cost-push inflationary pressure in an economy.

What are some of the key causes of the supply crunch?

1. Shortages of semi-conductor chips - The global semiconductor chip shortage is holding back manufacturing of products ranging from cars and games consoles to home appliances and toothbrushes
2. Cut-backs in natural gas imports - Russia has limited natural gas exports to Europe at a time of growing demand. In Europe, the price spike in natural gas is equivalent to if oil were trading around $200 per barrel.
3. HGV driver shortage in many countries - a Road Haulage Association (RHA) survey estimates there is now a shortage of more than 100,000 qualified HGV drivers in the UK.
4. Logjams at ports and warehouses - the cost of sending products around the world using container ships has surged. Shipping costs affect manufacturers and retailers alike.
5. Shortages of materials and components - supplies of key raw materials such as lithium, magnesium, cardboard are well below demand leading to higher prices and production delays.
6. Outward migration of labour from the UK - It is estimated that over one million workers from the EU have left the UK since the start of the pandemic.

Some of the causes of the supply crunch are short-term and perhaps transitory, whereas others point to longer-term causes. This distinction can be a good way of evaluating the macroeconomic impact.

How will the supply crunch affect some of the key macro objectives for the UK?

• Inflation: The supply crunch is causing higher input costs which many businesses will eventually pass on to consumers in higher prices
• Investment: Higher costs threaten to reduce company profits and worsen business confidence which might then hit capital investment
• Consumer spending: If prices are rising faster than wages, then real incomes will drop which might cause a fall in consumer demand
• Trade Balance: The UK is a net importer of many inputs such as natural gas, metals and minerals – which will worse the trade balance
• Economic growth: Persistent supply crunch will cause slower growth

What is the UK government doing to address the issue?

1. A three-month visa scheme to cover truck drivers and meat workers
2. Some temporary subsidies / emergency loans to help keep fertilizer plants open and secure supplies of CO2
3. Temporary extension to the limit on how long drivers may be at the wheel and shortened process to qualify as an HGV driver
4. In the medium term, the UK government wants businesses to respond to supply chain challenges by raising wages, improving training and lifting labour productivity
5. Increase in the National Living Wage to £9.50 an hour from April 2022

The supply crunch as a structural supply-side issue for the UK economy

• An ageing workforce - the average age of an HGV driver is 55, with just 1% under the age of 25. (Less than one per cent are female)
• Work incentives - in many sectors such as HGV driving and food processing, decreasing relative incomes and poor working conditions have caused people to find alternative jobs including in the gig economy
• Non-tariff trade barriers – since the UK’s exit from the EU, businesses now face extensive customs and regulatory checks, adding cost and complexity to cross-border trade. This is independent of a trade deal.