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Demand for Asian produce grew once again, can firms keep up with supply?


Asia’s factories once more see increased productivity as consumers become more willing and confident to spend on goods/services post-lockdown, with foreign trade also now becoming more accessible. Factory activity within Asia has continued to expand in May, Reuters reports, but this prospect of manufacturing recovery has been dimmed as supply has witnessed a shortfall, with labour shortages and land limits too.

This expansion in activity is attributed to the recovery in global demand as economies around the globe ease out of a COVID recession. This creates many positive externalities for factories in firms as they are able to see increased revenues which they can re-invest into increasing production and also new technologies as well. This is an example of organic growth as the factory is using profits to reinvest and continually grow and develop. This, therefore, provides work for local people such as those in China which is a secondary industrious sector-led economy, allowing them to spend, and also establishing a multiplier effect for the local economies.


However, rising raw material costs have hindered the outlook of this expansion. A spike in COVID-19 infections in some countries, especially from the new Indian variant could disrupt supply chains, posing a headache for manufacturers and weighing on Asia's export-driven recovery, analysts say. (Reuters) "A spread of new variants is already having a negative impact on supply chains. If this situation persists, it would hit Asian manufacturers that had been scrambling to diversify supply chains out of China," said Toru Nishihama, chief economist at Dai-ichi Life Research Institute.

"Asia's recovery has been driven more by external than domestic demand. If companies have trouble exporting enough goods, that bodes ill for the region's economies," he said. This also comes with many people in the highly populated China still catching COVID-19 and also becoming ill, therefore unable to work and contribute to the workforce in China as they take more days off of work.


Rises in the price of raw materials will reduce short-run aggregate supply, as fewer firms can afford these for production processes and so can make fewer goods/services whilst still maintaining basic profits.

Here, it can be directly seen that as firms see reduced operating budgets as are paying more for goods/services in the economy, aggregate supply shifts from AS1 to AS2, therefore reducing real GDP and also triggering cost-push inflation too. This has many negative effects especially for those on a fixed income, and also for the whole economy as it loses productivity.


The decrease of supply for raw materials, leading to high demand has been linked to India’s coronavirus outbreak that has infected 28 million, killed more than 300,000 and forced many states to impose restrictions on economic activity. This means that prices have risen and this has caused a spiral of decline for areas, such as Mumbai.


On the same aspect for manufactured goods, a global chip shortage and supply chain disruptions have hit car production, causing Japan’s output growth to miss expectations in April. This has been to the upset of car producers as demand for cars globally has recently skyrocketed, meaning producers lose out on lots of potential profits. Furthermore, Japanese auto giants Toyota Motor and Honda Motor have suspended output in Malaysia due to lockdown measures imposed to combat the pandemic, Kyodo news agency reported on Tuesday. This furthermore reduces potential supply and raises major concerns for not only the firms and suppliers but the larger economies of the world as well.

 

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