Over the past few decades, the world has become increasingly globalised, with the United Kingdom becoming a key trading partner for many nations.
Data from the ONS indicates that the value of UK trade increased by over 160% during the two years through 2019-20.
In 2020-21, the value of UK trade is expected to have fallen by nearly 16% owing to severely disrupted global supply chains and a drop in demand for UK goods, which was disrupted by the effects of the COVID-19 outbreak and government measures to stem its spread.
The COVID-19 pandemic is expected to continue to disrupt supply chains in the current year, despite businesses’ adaptions. Supply chains are being strained by excess demand from households, a surge in business confidence and high government demand, with global pledges echoing the UK government’s ‘Build Back Better’ motto to counteract the effects of the pandemic.
Furthermore, UK supply chains have been negatively affected by the implementation of the new EU-UK Trade and Cooperation Agreement since January 2021, which has limited the flow of goods across the border.
Pandemic-related disruption
China is often considered to be the factory of the world, but with COVID-19 originating from the country, its factories shut early in the pandemic. This led to intense supply chain disruption, which was mirrored around the world due to national lockdowns in other countries.
According to a report by business IT think tank Capgemini Research Institute, over 72% of UK businesses had contended with supply chain disruption as of September 2020.
Of these, over half expected disruption to last nearly six months, but this was prior to the start of the second wave that swept across Europe.
In addition, transportation has become a key concern for businesses in recent months. UK road freight has been interrupted as a result of the COVID-19 pandemic and new EU-UK trading rules. On a global level, supply chains have contended with reduced shipping availability and a lack of air freight capacity.
With the global collapse of commercial air travel, chartered cargo flights have been relied upon. This has significantly increased the cost of fast freight transport. More significantly, global shipping has been subject to delays, compounded by the obstruction of the Suez Canal; several operators have been skipping UK ports to unload goods in larger North European ports, adding month-long delays to supply chains.
Looking at the seven-day average of ship visits to UK ports, it was not until the start of June 2021 that visits to UK ports reached pre-pandemic levels.
The hangover of delays in shipping is expected to lead to a shortage in consumer products, such as garden furniture, over the summer of 2021. Moreover, the infamous global computer chip shortage is set to last until at least 2022.
Pent-up demand
In recent months, growing business confidence, spending of household savings and high government demand have put intense pressure on supply chains. This pressure is only likely to intensify in the coming months as the economy reopens, feeding through into rising prices.
As a result of social distancing restrictions, the household savings ratio reached a record 29.1% over the three months through June 2020, over triple the rate of the previous three-month period. As restrictions are loosened, consumers are set to release a substantial amount of saved cash.
As certainty returns to the economy due to the new EU-UK trade deal, the successful roll-out of COVID-19 vaccinations and the expected lifting of social distancing measures, businesses are set to expand their activities and investment. In addition, the UK government’s ambition to ‘Build Back Better’, which matches that of other global counterparts, is expected to massively expand state investment in infrastructure above pre-pandemic levels.
These components are likely to challenge global supply chains’ ability to meet substantial swings in demand for goods. As a result, after decades of low and stable inflation, there are fears that it will rise over the course of the year.
While consumer prices are expected to be held back by the temporary VAT reduction for hospitality businesses such as restaurants, construction materials are likely to be one of the most affected by excess demand. Construction material prices have rocketed since November 2020, with the Construction Materials Price Index anticipated to be 9.5% higher in April 2021 than the average over 2020.
Brexit
Since the start of the year, businesses have been struggling to adapt to the new trading relationship with the EU.
According to research by the Institute of Directors, 60% of firms surveyed over the two months through May 2021 were still finding it challenging to operate with the new trading arrangements. Approximately 40% of respondents expected EU trade to fall over 2021-22 and remain below pre-pandemic levels.
While this has mainly been affecting supply chains involving trade to the EU, it is expected to affect UK operators more severely over 2022. This is because the EU opted to immediately enforce all new regulations at the end of the transition period, while the UK has delayed this until January 2022.
UK exports to the European Union fell by 40.7% over January 2021.
The drop in EU trade since January 2021 is more related to export friction and UK operators running down stockpiles built up prior to the EU-UK agreement being reached. Additionally, due to the years of uncertainty over market access in the lead up to Britain’s departure from the EU, firms are expected to have rerouted their supply chains in order to avoid the EU-UK border.
This is likely to be one of the reasons as to why non-EU imports have surpassed EU imports since January 2021 and exceeded pre-pandemic levels. Following the introduction of full UK border controls on EU imports, their value of is expected to drop again. Moreover, the Northern Protocol has added greater complication to internal UK supply chains, but this is being re-evaluated by the EU and the UK in order to reduce friction.
Conclusion
Supply chains are crucial to the efficiency of businesses but the shocks caused by the COVID-19 outbreak and the new EU-UK trading relationship has led to a clear trend in the way in which firms now evaluate their suppliers. While not the end of globalisation, localising suppliers is a key way in which firms will look to mitigate future disruption in an uncertain world.
Research conducted by EY and London First in February 2021 found that ‘customs and supply chains’ was the most common source of disruption for 72% of UK firms surveyed.
Nonetheless, UK businesses must also diversify chains, spreading risk broadly in terms of regionality and manufacturing capacity. Over the next five years, with the continued global pandemic and its scars fresh in mind, contingency planning against disruption and quickly adapting to swings in demand will likely carry equal weight when evaluating suppliers.
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