Many sectors globally have been hit by labour shortages, a problem that has been particularly acute in the US and the UK.

In the US, despite vaccination progress and economic reopening, many would-be workers remain on the sidelines for any number of reasons: ongoing health concerns linked to coronavirus infection; people awaiting retirement; workers focusing on other priorities; and mothers remaining at home to care for children (possibly reflecting a lack of childcare).

In fact, one of the biggest factors holding back labour supply is the relatively low participation of women in the US jobs market. The pandemic has resulted in many women assuming the role of primary caregiver in their households. After the global financial crisis, it took a very tight labour market to encourage this group of women to rejoin the labour force, which leads us to believe their return to work following the pandemic will be slow.

The UK is subject to the same supply pressures as other advanced economies, but Brexit adds a layer of complexity. Although we still expect most of the effects of Brexit – weaker investment expenditure, trade frictions and reduced labour market flexibility – to be felt over the medium term, some of the consequences of leaving the EU are already apparent, and reduced labour supply is among the most obvious.

There’s little doubt that net migration into the UK has fallen sharply in 2021 and, in all likelihood, many EU citizens who left the UK in the immediate aftermath of Brexit, or during the pandemic, are unlikely to return. There’s a clear sense that, from now on, the UK labour market will not be as fluid as it was prior to Brexit and the pandemic.

The rise in demand for raw materials since economies reopened has far outstripped supply. Resource-exporting countries in Latin America, the Middle East and Africa have experienced a slow recovery, which has led to shortages of precious and industrial metals, coal, and oil and gas, causing acute supply chain disruptions and pushing prices higher.

As economies continue to reopen and vaccination rates pick up, we expect exports of commodities and raw materials to pick up, too. That said, increased production of key raw materials may continue to lag demand, which means upside pressure on prices could persist throughout 2022. For example, crude oil inventories are already quite low and are likely to remain below pre-pandemic averages over the course of next year.

Energy supplies are also subject to a range of geopolitical drivers, including the role of fossil fuels amid the need to cut carbon emissions, and supply management by Opec.

A dearth of semiconductors – vital in a range of sectors – has been among the most noticeable shortages, and it could have an outsized impact on the growth rates of many economies. Shortages are having a profound impact on the ability of auto, smartphone, and computer manufacturers to meet demand (often to the detriment of sales).

The semiconductor industry is cyclical in nature, and the current upswing in the sales cycle has been amplified by the switch to the pandemic-induced working-from-home model, which has led to higher demand for electronic devices and increased adoption of smart home appliances. This increased demand looks to be here to stay as many working arrangements have shifted permanently towards remote or hybrid models.

Unfortunately, the demand for semiconductors has not been met by a timely increase in production capacity, resulting in supply bottlenecks for chips. Given that production capacity is slow to come online – it takes up to two years to redesign new production plants to meet rising demand – we expect the chip shortage to persist into 2023.

Developed markets saw an early pick-up in demand after the initial shock of the pandemic, and this was down to the huge fiscal support that was provided to consumers. By contrast, many emerging markets experienced a faster recovery in production as their governments chose to prioritise the reopening of factories.

But this has resulted in increased demand for the shipping and logistics needed for goods to flow from these emerging markets to more developed countries.

Congestion at ports, coupled with a mismatch between the supply and demand of containers, has led to soaring shipping costs. By the end of September, global sea freight rates for container shipping were almost 10 times higher than in January 2020.

Container prices represent a useful proxy for the price fluctuations of imported goods and reflect the impact of logistical shortages in the supply chain. However, whether these cost increases will make their way into prices of final goods largely depends on the pricing power of companies. While the discrepancy between supply and demand for containers will eventually normalise, this balance won’t be achieved until well into next year.

In addition to higher prices, limited capacity has resulted in slower delivery times around the world, although the problem has been particularly pronounced in developed markets. The most recent manufacturing Purchasing Managers’ Index suggests this situation is unlikely to ease as we approach the holiday season. In fact, it looks set to last at least through Q1 next year – if not longer.

It goes without saying that these bottlenecks are going to have inflationary effects, but their impact will vary by region and sector.

Will they be temporary? Raw materials shortages and logistics issues may ease in 2022, when demand normalises and more countries reopen. Weather-related disruption to energy supplies should also ease sooner rather than later.

However, increasing semiconductor production and shipping capacity to accommodate structurally higher demand may take at least a year – perhaps even two. The realignment of manufacturing supply chains and labour shortages may last even longer. These supply shortages may feed into higher prices for a wider range of goods and services, pushing up core inflation in the medium term.

Over the longer run, a shift in manufacturers’ strategies to enhance supply chain resilience by building “just in case” rather than “just in time” supply chains may lead to structurally higher production costs and inflation, although this should be a gradual process.

What’s more, geopolitical changes that began prior to the pandemic, including Brexit and US-China trade tensions, might also be drivers of inflation over the long term.

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