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Home / Economy / The economic rebound from Covid-19 was easy. Now comes the hard part

The global economy’s comeback from last year’s deep contraction is approaching a delicate juncture, as policy makers and executives grapple with the bumpy transition from the post-pandemic reopening to a more normalized pace of growth.

Central banks in the U.S. and elsewhere are trying to chart a path that will curb inflation but not choke off growth as they navigate the process of weaning economies off the extraordinary measures—including rock-bottom interest rates and enormous bond-buying programs—deployed to support their economies.

The surge in U.S. consumer demand over the past year—turbocharged by trillions in stimulus—has ricocheted outward and caused disruptions to global supply chains that are now worsening and may stretch through 2022, say executives. The resulting higher prices and the struggle to secure raw materials and labor are piling the pressure on some companies and weighing on major economies such as Germany.

Meanwhile, China is in the midst of an ambitious effort to reform its economy, including reining in household and corporate debt, particularly in the country’s housing market, clamping down on the technology sector and pursuing ambitious climate goals—factors that could slow growth there and globally.

As a result, the global recovery—while still robust—is at a precarious point, with the risk of missteps.

“This is the hard part of the recovery," said Neil Shearing, chief economist at Capital Economics in London. “Policy makers need to work out what’s permanent and what’s likely to be short-lived."

If central banks move too slowly, inflation could continue to rise, with price increases and higher wages feeding off each other. But if they increase rates too quickly, that could choke off the economic recovery in a world of high debt.

“It’s very, very difficult to forecast and not easy to set policy," Federal Reserve Chairman Jerome Powell told reporters Wednesday after unveiling plans to begin scaling back its $120-billion-a-month bond-buying program this month.

“Inflation has come in higher than expected and bottlenecks have been more persistent and more prevalent," he added. “We see that they’re now on track to persist well into next year. That was not expected by us, not by other macro forecasters."

Some moves are catching investors by surprise.

The Bank of England’s decision Thursday not to raise interest rates triggered the biggest moves in U.K. bond yields in years. The same day, the Czech central bank hiked its key rate by much more than expected, to 2.75% from 1.5%.

Only about a fifth of businesses judge that the worst of the supply-chain disruptions has passed, according to an October survey of large businesses by Oxford Economics. A third of respondents said the disruption would likely extend through the end of next year or beyond.

The challenges are especially stiff in the U.S., where fiscal stimulus worth almost $6 trillion has driven consumer spending about 9% above its pre-pandemic level and where supply bottlenecks helped push inflation up to 5.4% in September, a 13-year high.

“It’s a tough time we’re in," said Jeffrey Edwards, chief executive at Cooper-Standard Holdings Inc., an auto-parts manufacturer, last week. “We’ve not been able to offset the widespread inflationary impacts we’re seeing in materials, energy, transportation and labor."

The company reported lower sales and a loss in the third quarter. Mr. Edwards said the company is considering selling off some assets.

At ports along the east and west coasts, container volume was almost one fifth above its 2019 level in the three months through June, according to Fitch Ratings.

“In the spring I was pretty sure things would start to ease up in the fall. What happened is things actually got worse," said Lars Mikael Jensen, head of network at containership giant A.P. Moller-Maersk A/S. “So I’ve stopped forecasting."

The U.S. economy produced more than half a million new jobs in October as businesses sprang back from a summer slowdown caused by the Delta variant of Covid-19, the Labor Department said Friday. It also said about a quarter million more jobs were added in August and September than it had previously estimated. The average hourly wage for private sector workers rose by 4.9%, roughly double the annual average wage gain in the 15 years before the pandemic.

In China, growth is likely to slow to an annualized rate of 3% or 4% over the next few quarters, according to Nomura, as the world’s No. 2 economy is throttled by energy and material shortages and government crackdowns on key industries like real estate.

“This slowdown is going to be bigger and longer than any one we have seen in the past 10 years" in China, according to Kevin Lai, chief economist for Asia excluding Japan at Daiwa Capital Markets.

Sluggish domestic demand and shipping bottlenecks have resulted in many order cancellations at a small motorcycle parts factory in the southern Chinese city of Dongguan, according to the woman who runs the plant, Ms. Luo, who asked to be identified only by her surname.

The factory is dealing with soaring prices for raw materials such as steel, Ms. Luo said. Moreover, last month, Ms. Luo’s factory was forced to operate only during late hours for three weeks when local authorities in Guangdong Province limited power consumption due to the widespread power crunches in the country.

She said she expected demand to cool next year “as the overall economic condition is worsening, not just manufacturing."

Despite strong demand, Red 100 Lighting Co. Ltd, based in eastern Shandong Province, is struggling to deliver goods to overseas customers because of shipping jams and sporadic Covid-19 outbreaks in several major ports in China, said Ms. Zhao, a marketing manager at the company, who also asked to only be identified by her surname.

In Southeast Asia, Covid-19 outbreaks have receded and factories have reopened, restoring some key links in global supply chains. But the region continues to face labor shortages, high shipping prices and Covid-19 outbreaks.

Jonathan Moreno, who oversees operations in Vietnam for Diversatek Inc., a Milwaukee medical-supplies company, said his local workforce is now fully vaccinated. But when one of his workers tested positive recently, other staff who were in contact with the worker—about 15% of his workforce—had to be sent home for a week too.

Germany’s economy, Europe’s largest, is expected to stall over the coming months as supply bottlenecks weigh on the nation’s powerful manufacturing sector, particularly in the auto industry. Manufacturing output was 10% below pre-pandemic levels in September.

European new-car sales shrank by almost a quarter in September compared with a year earlier, the lowest for that month since 1995. Czech car manufacturer Skoda Auto, a unit of Volkswagen AG, is throttling back production over the coming weeks because of the shortage of semiconductors and expects to produce about 250,000 fewer vehicles this year due to missing parts.

Heinze Gruppe GmbH, a German auto-parts manufacturer with around 1,100 staff that supplies Porsche, BMW and Mercedes, entered preliminary insolvency in September after struggling all year with price increases, monthslong delays for materials such as plastic, and the closure of some car factories due to chips shortages, said Chief Executive Joerg Tilmes.

“I have been in the car business since I was 25 [and] the situation has never been as drastic as it is right now," Mr. Tilmes said.

Companies are grappling with how to plan given such poor visibility into when supply-chain disruptions will lift.

Customers “were very sure there would be a recovery starting in September, so we were requested to have high inventories and people ready to work at the end of the year. This did not happen," said Pierre Boulet, CEO of Novares, a French company that makes plastic components used in one in three vehicles world-wide.

In recent months, Novares customers canceled orders on more than 150 occasions with less than 48 hours’ notice. “Our inventory is growing and growing," he said. “This is brutally impacting cash because we buy and don’t sell."

In Madison, Wis., Josh Glenn is caught between booming demand and constrained supply. Mr. Glenn, who owns an appliance-repair company, said his technicians are booked more than two weeks out, up from three or four days before the pandemic. But a shortage of parts has made it hard for him to meet the demand.

“I’ve had a guy that’s been waiting for a part for his refrigerator for two months," he said.

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