The supply chain crunch will persist and place upward pressure on already high inflation, warned one Citigroup economist.
"The supply chain picture continues to look pretty severe... as a result of some of these geopolitical developments, their implications for commodities in particular," Citi Global Chief Economist Nathan Sheets said on Yahoo Finance Live (video above). "That's exacerbated by uncertainties about production as a result of Asia and China's zero COVID policy. ... And I think that it means for inflation, that we're going to continue to see some of this supply shock-driven upward pressure on prices."
Sheets stressed that the ongoing issues are "having a very powerful effect on the global economy. I think that we are clearly now seeing demand destruction."
Sheets's comments come after his team released an alarming note on the state of global supply chains earlier this week.
"To relieve the stress in global trade, we ultimately need to see an improvement in the pandemic," the strategists wrote. "Some specific supply chain issues are beginning to unwind but there are still a number of lingering unknowns."
In the note, Sheets and his team explained that the pandemic demolished the idea that global supply chains were fully optimized.
"Until the pandemic, the broad consensus was that supply chains were 'optimized' and functioning smoothly," they stated. "Firms were thought to have broadly solved the riddle of how to keep inventories lean and simultaneously ensure a reliable flow of inputs for use in production. ... Rather than a smooth predictable flow of demand, production, and transportation — the past two years have seen surging demand for final goods coupled with episodic disruptions in the availability of the inputs required to produce those goods."
'Light at the end of the tunnel'
Supply chain stress continues to be most acute in the tech and auto industries.
UBS Tesla analyst Patrick Hummel slashed his 2022 earnings per share estimate on the EV maker by 12% in a new note on Thursday, citing Shanghai COVID-19 lockdowns that are weighing on supply chains and manufacturers in the region.
Semiconductors, meanwhile, continue to be in short supply in large part due to Chinese lockdowns and solid demand for PCs and autos during the pandemic.
"We are about halfway through [the chip shortage]," Intel CEO Pat Gelsinger told Yahoo Finance Live on the sidelines of the World Economic Forum in Davos, Switzerland, in late May. "My expectation now is that it persists through 2024. And the big issue that we've additionally faced over the last six to nine months is equipment that goes into the [fabrication plants]."
Still, Citi's Sheets sees a few glimmers of hope when it comes to supply chains — though they remain in the distance.
"If there is any light at the end of the tunnel on these supply chain pressures, it's really that this demand destruction is now resulting in a session where goods spending is starting to weaken," Sheets said. "It may over time help reduce some of these supply chain pressures. But that is still a little speculative. What we are seeing is tightness at the moment."
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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