Supply Disruptions Add to Inflation, Undermine Recovery in Europe

cryptonews.com:

Kristalina Georgieva is Managing Director of the International Monetary Fund (IMF), Oya Celasun is Assistant Director in the European Department and leads the surveillance of the German economy, and Alfred Kammer is the Director of the European Department at the IMF. 

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With supply constraints likely to persist, the challenge for policymakers is to support recovery without allowing high inflation to become entrenched.

When countries asked people to stay at home to control COVID-19, consumers cut spending on services and bought more manufactured goods instead. The reopening of economies boosted manufacturing output, but renewed lockdowns and shortages of intermediate inputs from chemicals to microchips caused the factory recovery to stall. Prices of core consumer goods rose rapidly as delivery times reached record highs—sparking a debate about inflation and the course of monetary policy.

In a new paper, we estimate that euro-area manufacturing output in the fall of 2021 would have been about 6% higher without the constraints on supply. Based on the historical correlation between manufacturing and overall output, we assess that gross domestic product would have been about 2% higher—equivalent to about one year’s worth of growth in normal pre-pandemic times for many European economies.

The drag on output was largest in countries where manufacturing firms operate at the downstream end of global value chains and are reliant on highly differentiated intermediate inputs. Key examples include countries with large automotive sectors, such as Germany and the Czech Republic, where manufacturing output would have been as much as 14% higher.

Supply constraints also played a significant part in fueling producer price inflation in