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The Economic Consequences of Disrupted Global Supply Chains

Given the importance of broken supply relationships in the current downturn, this recession is likely to be unique. To anticipate the recovery therefore requires understanding the COVID-19 pandemic’s effects on global supply chains.

MUNICH – For nearly three decades, global supply chains were the quiet engines of economic globalization. From 1990 to 2008, they drove the rapid expansion of trade, accounting for 60-70% of its growth. More than a decade later, however, they have stalled – and may in some areas be going into reverse.

The strain on global supply chains partly reflects the turn by many governments toward protectionist policies since the openness of the world economy peaked in 2011. And now, the COVID-19 pandemic has caused a supply-shock recession. The related uncertainty may slow the expansion of global value chains by at least 35%. Indeed, world trade is no longer expanding faster than world GDP. If this continues, companies will reshore manufacturing from Asia and elsewhere.

It’s clear that shrinking production at firms worldwide will create a recession – and a recovery – unlike any we have seen. In outlooks for next year, the International Monetary Fund, the OECD, and other international organizations assumed a V-shaped recovery. But this narrative was likely influenced by the rapid recovery of global value chains after the 2008-10 Great Recession, a downturn that originated in the financial system, not the real economy worldwide. Given the importance of broken supply relationships in the current downturn, this recession is likely to be unique.

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