Global supply chains face “fragmentation risk” that would lead to higher costs and inflation, the International Monetary Fund (IMF) has warned.

The IMF said geopolitical events were causing a “reconfiguration of supply chains” that could pose a long-term threat to resilience and stability, while the energy crisis was likely to peak in 2023.

Gourinchas Pierre-Olivier , economic counsellor and director of the research department at the IMF, said: “The energy crisis, especially in Europe, is not a transitory shock. The geopolitical realignment of energy supplies in the wake of the war is both broad and permanent. Winter 2022 will be challenging, but winter 2023 will likely be worse.”

Speaking at the launch of the IMF’s latest World Economic Outlook, Gourinchas said: “One concern is what could happen, maybe not in the immediate future but further down the down the road, is fragmentation risk. Are we about to see a reconfiguration of supply chains because of geo-economic fragmentation? 

“That’s something that is certainly a worry. That’s something that we would certainly not want to see. We like to see diversification of supply chains so that economies can become more resilient, and certainly not anything that looks like blocs.”

Gourinchas said that geopolitical realignments of supply chains following Russia’s war in Ukraine will be a long-term outcome of the conflict and high inflationary pressures along the supply chain have yet to peak.

The IMF warned global growth is set to shrink as the energy crisis comes to a head. The IMF predicts growth in the US will slow to 1% in 2023 but the growth slowdown will be “most pronounced” in Europe, where the energy crisis will cut growth to 0.5%.

Global inflation is expected to peak at 9.5% in 2023 before dropping to 4.1% by 2024. 

The IMF said inflation is broadening “well beyond” food and energy. Global core inflation rose from a monthly rate of 4.2% at end 2021 to 6.7% in July. The IMF said inflation could “prove more persistent” if labour markets remain tight.

The IMF also stressed “the war in Ukraine is still raging” and further any escalation in the war had the potential to exacerbate the energy crisis.

By placing supply chain diversification at the heart of fiscal policy, governments can help build global resilience, Gourinchas said.

“Fiscal policy can help economies adapt to a more volatile environment by investing in productive capacity, human capital digitisation, green energy and supply chain diversification. Expanding these can make economies more resilient when the next crisis comes,” he said.

“Overall, this year’s shocks will reopen economic wounds that were only partially healed post-pandemic. In short, the worst is yet to come and, for many people, 2023 will feel like a recession.”

Source:  Supply Chain Management News