['Bottleneck Economy' Attack ②] Demand Exceeds Supply... Imbalance Fuels Inflation

[Asia Economy Reporter Park Byung-hee] The bottleneck phenomenon, where supply cannot keep up with exploding demand, is likely to become a variable in the global economy this year, which is expected to have the highest growth rate since the 1960s. This is because the supply-demand imbalance caused by bottlenecks is increasing the risk of inflation. As a result, controversies surrounding the monetary policies of central banks, including the U.S. Federal Reserve (Fed), are growing. The problem is that it is still uncertain when these bottlenecks will be resolved.

◆ Supply Chain Instability Hits the Real Economy = The global supply-demand imbalance has led to production disruptions of finished products such as automobiles, smartphones, and home appliances, eventually impacting the real economy. Due to semiconductor shortages, global automobile factories have halted operations, and plans for mass production of new smartphones have also been disrupted.

Samsung Electronics' Galaxy A series, which was first introduced to the global market in March, has been delayed due to a shortage of semiconductors (application processors). Although it was planned to be launched immediately without reservations, only the Galaxy A52 has been released in some regions so far, while the A72 remains unavailable. Samsung Electronics IT & Mobile (IM) Division head, Koh Dong-jin, stated at the March shareholders' meeting, "The global semiconductor supply shortage is severe," adding, "It will be a major issue in the second quarter."

Display production is also delayed due to a shortage of display driver ICs (DDI), affecting finished TV production. According to TrendForce, TV shipments scheduled for the fourth quarter of last year were postponed, and bottlenecks in monitor panels are expected in the first half of this year, causing shipment disruptions. The shortage of DDIs has driven up LCD panel prices, deepening the concerns of TV manufacturers.

In the shipping industry, bottlenecks have become the new normal. Although the industry is experiencing an unprecedented boom, export companies face a double burden of bottlenecks caused by overflowing cargo volumes and high logistics costs due to elevated freight rates. A representative of a small to medium-sized domestic logistics forwarding company said, "For shipping companies, the situation is positive, but for export companies that must complete shipments by deadlines and the forwarders supporting them, it is challenging. Conditions are better for nearby destinations, but it is difficult to secure space on routes to the Americas, Europe, and Latin America," adding, "I think this situation will continue for some time."

◆ Concerns Over Economic Overheating and Fed Tightening Debate = According to a Bloomberg survey conducted from the 7th to the 13th among 71 Wall Street economists, the median U.S. economic growth rate for this year is 9.3%. This is because consumption, which accounts for 70% of the U.S. economy, is exploding. U.S. consumers have saved $2 trillion in cash over the past year, and U.S. consumer spending is expected to increase by more than 10% annualized this year.

There are calls for the Fed to hasten the introduction of tightening measures to prevent economic overheating. The Fed maintains that inflation risks are temporary and intends to continue its accommodative stance as much as possible. However, economists argue that the Fed’s view is risky, stating that inflation risks will gradually disappear. Economists do not agree with the Fed’s view that inflation risks are temporary.

William Dudley, former president of the New York Federal Reserve Bank from 2009 to 2018, argued that the Fed should raise the benchmark interest rate up to 4.5% to cool down the overheated economy.

Economists also point out that the Fed’s current stance is risky because a sudden sharp increase in the benchmark interest rate could throw financial markets into turmoil. They warn against sticking too rigidly to accommodative policies and missing the right timing.