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Lockdowns have meant Australia’s economy has moved sharply backwards in the September quarter. But for much of the rest of the world, while COVID outbreaks continue to disrupt, the economic recovery over recent months has been strong.
Behind the recovery has been massive amounts of government fiscal supports, totalling almost 10% of global GDP. Those dollars helped individuals and families that lost work; provided grants to businesses to continue operating as lockdowns dried up demand; and funded massive health and infrastructure responses.
But some of those extra dollars also flowed through to household savings. And they’re now being drawn down as lockdowns around the world ease. That’s seeing global demand for consumer goods increase.
At the same time, supply disruptions are causing headaches for the shipment of all these newly purchased products from overseas. Available ships are almost at full capacity, and a global shortage of containers is hindering the movement of goods even more. Congestion at ports and lower productivity at terminals have also led to bottlenecks. And distancing rules, temporary closures and reinforced hygiene standards have increased intervals between crew shifts, especially following the spread of the Delta variant in many Asian economies. This has blown out processing times at ports, hampered the return of containers to Asia and generated delays along the entire global shipping chain.
The combination of supply disruptions and increased demand has pushed shipping costs to new heights. Relative to 2019, global shipping costs have jumped almost four-fold (see chart). And this looks set to persist, with significant additional shipping capacity only likely to appear in 2023.
Chart: Price changes through COVID, 2019 = 100
Higher shipping costs are just one of the factors contributing to upward global price pressures. Many governments have also been pump priming by spending on large-scale infrastructure projects to stimulate the recovery. These projects require massive amounts of raw materials such as iron ore and coal. And that’s seen global commodity prices jump, and generally remain elevated through the first half of 2021.
But some of that strength has eased, with the slowdown in China’s property sector (and looming default(s) by Evergrande) partly to blame. The iron ore price has dropped from more than $US220/t to just a fraction above $US100/t in a matter of weeks.
That’s important for Australia in two key ways. First, the price is lower because demand is lower. And that could see our largest export take a hit. Second, the higher iron ore price through the pandemic provided a very helpful boost to government revenues in the face of record spending. But that’s dried up now.
That said, other commodity prices remain strong, including coal, silver, gold, aluminium and tin. And so while iron ore has taken a hit, many other commodities continue to benefit from a pandemic premium.
Just how central banks respond to these global price pressures will be important. Many of the factors currently driving global inflation remain temporary, driven by pandemic-induced disruptions. Going forward, some of these pressures will likely ease as the movement of goods (and services) normalises and supply chain disruptions fade.
David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis. David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.
Harry joined Deloitte Access Economics in January 2017 after completing a Bachelors of Arts and Commerce, with honours in Econometrics and Business Statistics from Monash University. Harry’s area of focus is data analytics and econometric modelling, having conducted a range of research surrounding mental health, prescription drug use, labour markets and ageing populations.