Shortages and Consumer/Business Confidence

Shortages – why?

We are facing shortages on many fronts for a range of reasons including:

• The fast recovery in demand from the pandemic. The economy is now back to where it was in 2019, so we need more supply and production capacity than we had in 2019 after two years of limited spending.

• The “new normal” that has emerged is different and requires a different mix of supply.  Behaviours have changed. So there is a shift in what is needed for supply to meet demand.  Some sectors grew very fast during the pandemic and are still growing fairly fast . For example eCommerce. Online sales dropped 15% as normality began to return but are still 20% above pre-crisis. They were 22% of retail sales pre-crisis, are now 26% having peaked at 37%. Meanwhile other sectors, for example commuter travel, have shrunk and are unlikely to return to previous levels for a long time.

• Employers have lost staff. Whilst the UK government like some others introduced a furlough scheme to protect the employer – employee relationship it seems many employees have not returned to their previous jobs, most notably in the airline industry. And there are other reasons – See the article “Employment” (link).

Shortages – getting better

The shortages, and associated price rises, will ease, or at least level out over time.

• It is a quirk of the annual nature of most figures reported. An annual growth or inflation rate is measured by comparison to 12 months earlier. So the 54% increase in household energy costs of April 2022 will become the base for comparison in April 2023.

• The market tends to adapt.  A shortage causes higher prices and entrepreneurially that leads to investment in more capacity. And customers find alternatives – like automation to replace more expensive staff/staff shortages. The time to adapt clearly depends upon industry.

  The specific shortages we have experienced are getting addressed as the market adapts.

• Distribution, the first challenge we faced last September is now easing and is reporting capacity growth.

• Semi-conductor shortages and other supply-chain problems that have hit the motor industry are beginning to ease as production ramps up and the industry has also adapted – in an interesting way – see Social unrest article below.

• Energy would probably be showing a price decline (on an annual basis) by next year if it were not for the war in Ukraine and sanctions which look as if they could still make the problem even greater.

Shortages – getting worse

The problem for the medium term is the war in Ukraine is looking likely to extend some of the shortages and cause further and different shortages, especially of food, minerals and metals where Ukraine and Russia were major producers. Depending upon the politics energy could be badly affected too.

There are continued problems with supply from China due to Covid and India due to an exceptional heatwave and a coal shortage. Unfortunate timing when we need those major countries increasing global supply capacity.

Strangely though UK retail sales volumes unexpectedly rose by 1.4% month-on-month in April after dropping 1.4% in March. So fears of inflation are not necessarily dampening spending. But more about that in the following article (social unrest).

That optimism is despite the supply and staffing challenges and the large amount of restructuring happening as the economy rebalances to reflect the new normal.

One reason for the positivity amongst the entrepreneurial businesses within MD2MD is probably that they tend to move more quickly to take opportunities than the corporates. While the pandemic and the new normal is causing difficulties in some industries and for corporates that cannot adapt quickly, it is also creating many opportunities for fast moving medium sized businesses such as those that are members of MD2MD.

And to reinforce that trend, there is currently a large amount of cash available for investment. After two years of limited ability to invest, financiers are keen to get their fund money invested in growing businesses, especially those well placed to gain from the changes driven by the pandemic.

One of the trends that is taking place seems to be reshoring. We have realised that whilst a global integrated just-in-time supply chain can be efficient and cheap we need to balance that against the chances of such a chain being disrupted by uncontrollable events. Which has led to strategic decisions by major players and others to ‘reshore’  supply.  In other words, source in the UK. A direction of travel reinforced by complexities caused by Brexit.

I know a number of members are making that decision, and others that are the beneficiaries.  Let’s hope it leads to a resurgence in UK manufacturing… and efficient UK manufacturing using robots and automation. We lag behind the rest of the advanced world on this front because it has been easy to import cheap labour. Perhaps the silver lining of the staff shortage will be an improvement in productivity. In white collar jobs as well as Blue collar.

Finally of course even tough times create opportunities for some. For example, recruitment is obviously doing really well. Business failures may be running 33% higher than pre-pandemic. That creates work for the restructuring specialists and opportunities for the smart MD2MD members who can acquire businesses cheaply.