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How the global recession, cost of energy, increased inflation, increased interest rates will affect the IT supply chain (Part 1)

In this two part article, we take a look at why the IT supply chain is under threat. Then we give some guidance on what you can do to build more resilient supply chains.

To say that the last two years have been disruptive across a wide swathe of industries would be like describing the Great Chilean Earthquake that travelled across the Pacific Ocean at 200 miles an hour and caused between $3 – $6bn worth of damage as ‘a bit of a wobble’. 

The IT industry has undergone a drastic change as businesses have had to pivot to remote work and deal with unprecedented infrastructure challenges. Unfortunately, it doesn’t look like we’re getting back to business normal any time soon. 

As the prospect of a global recession becomes likely in the next period, the IT industry will again have to adapt to survive and thrive. In particular, the extended supply chain that the world has come to rely on has come under extreme strain. This will have serious ramifications for the IT industry as a whole. 

Inflation and the supply chain

There is a common saying, “When America sneezes the world catches a cold”. And when America raises interest rates you can expect it to impact the global economy in many ways. The Fed is hoping that higher interest rates will slow down inflation, but current events are proving to be challenging as supply chains, which seemed to show signs of recovery in early 2022, are again being stretched. Before we look at where we are, let’s look at how we got here. 

As is the case with a myriad of the challenges the modern world faces, it all started with the pandemic. In many countries, government stimulus packages along with reduced social spending because of lockdowns meant that people were spending more on general and luxury consumer goods. We’ve yet to see this trend change. 

Shipping and transport costs increase

As demand has increased, global supply chains across all industries have been affected due to lockdowns and waves of infection. The shipping industry has also failed to keep pace with the need for goods. Across the world there are severe shortages of vessel and warehouse space, as well finding the staff needed to keep things running. It takes years to expand and scale in this industry, and it will still be a long time before there is anywhere near the capacity needed for current demand. Due to the above, shipping and transport prices are climbing higher and higher.

Demand versus supply

The basic rule of supply and demand comes into play here – prices for limited stock hit record highs as demand soars. This has an impact on IT assets as there is often cross-over between the items needed for personal and business use. There has been minimal supply of semiconductor chips, which are necessary for almost every kind of consumer and other electronics. 

The Covid-19 pandemic led to a rush of orders for IT equipment and assets as several factors combined to create the chip shortage. Many companies are still having to order weeks and months in advance for the equipment they need.  

New lockdowns in China and war in Ukraine

The system is being placed under further strain by current events. 

China is going into lockdown again and the Russian invasion of Ukraine will likely lengthen delivery times and raise prices. We’ve already seen flights and shipping re-routed, supplies of palladium and nickel under threat as well as energy prices spiking. Lockdowns around Chinese electronics centres only push delivery dates further and further away. 

Rising energy prices

Volatile and rising energy prices impact all areas of the supply chain from manufacturing to logistics. These also introduce technical risks to the stability of firms as they are unable to react flexibly to changing energy prices. If these price changes are not able to be passed on through the supply chain, it puts firms at risk of going bankrupt.

Is the answer raising interest rates?

All of the above means that demand has never been higher while there are minimal supplies available. Before the current situation, it was hoped that a strengthening supply chain would help in damping inflation. 

The conventional wisdom is now that inflation is going to be around for longer than expected and is going to be a bigger problem. This is why we’re seeing institutions, such as the Federal Reserve, looking to tighten monetary policy through methods such as raising interest rates. 

In the next article on this topic, we’re going to look at the impact of these higher interest rates as well as what you can do to build resiliency into your supply chain as we face a possible global recession. 

While you’re waiting (breathlessly)  for the next article, please give us a shout at info@relltek.com or call us at +44 (0)203 0922 787  if you would like to have a chat around your IT asset supply chain.

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