Supply issues ease, exposing a drop in demand: Fitch

Over the past year, supply chain disruptions have been a key driver of inflation. But now, as those blockages ease, diminishing demand is revealing itself as a factor as well, says Fitch Ratings.

The rating agency said in a new report that recent signs of easing of global supply chain pressures — driven by faster delivery times, lower shipping costs and reduced order backlogs — are consistent with its outlook, but that there remains larger risk to credit conditions from eroding demand.

“Several indicators point to a normalization in supply chain conditions to pre-pandemic levels,” Fitch reported.

Yet, that shift is “primarily due to weakening demand, rather than capacity expansions,” the agency added.

Fitch noted that the effects of elevated inflation and rising interest rates are starting to crimp demand in sectors such as consumer technology and housing.

“Major chipmakers are reporting a rapid decline in demand, resulting in production cuts and rising semiconductor inventories,” the agency said.

“Separately, rising mortgage rates have significantly increased the average monthly payment of homebuyers and dampened housing demand,” it added.

Fitch’s current global forecast calls for a mild recession starting in the second quarter of 2023.

“Our outlook implies weaker demand across most sectors in 2023,” the agency said. “This will pressure revenues and cash flows, as the positive effect of less congested supply chains on input costs will be only a partial offset to lower demand.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.