December volatility index shows recession risk

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An economic indicator tracking global trade patterns shows the risk of a recessionary period has grown slightly, in light of declining demand in December for raw materials, commodities, and other components needed to provide finished goods and services, according to the New Jersey-based supply chain consulting firm GEP.

GEP’s analysis found that more businesses are boosting their “safety stock” inventories, particularly in Europe and North America, due to a resurgence in covid infections in China and increased concerns about future supply and pricing. That trend partly reverses the destocking efforts seen in the prior six months.

“We are shifting from a sellers’ to a buyers’ market, and companies should be pushing back hard on all price increases from their suppliers, which will continue to drive down inflation. Falling demand signals the increasing likelihood of a global recession in the first half of 2023,” John Piatek, GEP’s vice president of consulting, said in a release. 

The finding comes from GEP’s “Global Supply Chain Volatility Index,” which rose from 1.15 in November to 1.61 in December. The index tracks demand conditions, shortages, transportation costs, inventories, and backlogs. Combined into a single index figure, a value above zero indicates that supply chain capacity is being stretched and volatility is increasing, while values below zero indicate that supply chain capacity is being underutilized and volatility is less.

The latest increase halts an improvement trend in the world’s supply chains that had begun in the summer of 2022. But while the index number rose slightly in December, it remains far below its high point near seven, during the fourth quarter of 2021. Since them, the volatility index has dropped steeply as the global economy recovered from pandemic shock.

Other conclusions from the December report found that:

  • supply chains feeding into Europe remain the most stretched, compared to Asia and North America.
  • companies report an uptick in labor shortages, causing supplier capacity to be stretched.
  • transportation costs are at their lowest in over two years, showing weaker pressures on shipping, train, air and road freight.