Eurozone living standards are at risk of permanent damage if supply chain disruption does not ease soon, the European Central Bank has warned.
Globalisation could be partially undone if businesses are ultimately forced to abandon their low-cost suppliers and shift to more expensive but closer sources of goods and materials.
The ECB said in its latest economic bulletin: “The supply shortages have been building up over time. Depending on the persistence of global value chain disruptions, firms might consider finding new suppliers, transport routes, locations of production and more broadly new supply chains.
“If this happens, sectors that have greatly benefited from international exposure and globalisation in terms of productivity growth might experience a decline in trend total factor productivity. All else being equal, this could lead to a trend decline in potential output growth for the most affected countries.”
Productivity growth is key to future prosperity, as all else being equal it signals that an economy is generating more wealth from the same resources. Pay rises and living standards depend in the long-run on productivity growth.
Despite global supply chain disruption in the pandemic, so far business leaders have been confident normality will return. But the ECB’s analysis warned “recent developments in value chains may force them to reconsider their views on this”.
Reshaping supply chains can be expensive as eurozone economies are unusually highly integrated into global markets, the ECB said, but the cost of changing tack could be worth it to get around long-term disruption.
Depending on the extent of the pain, the ECB estimates that trend productivity growth could be hit by between 0.1 and 0.3 percentage points for the currency area as a whole, rising as high as 0.7 percentage points for France, where its aeronautics trade has been particularly hard hit by Covid.
Germany’s economy has already struggled to regain momentum as its vital car industry was hit hard by the lack of supplies, so the prospect of prolonged trade difficulties will be particularly worrying.
