The world economy could be headed for the “mother of all” supply chain stumbles.

That’s the warning from HSBC economists who caution that if the highly infectious omicron variant which is already swamping much of the global economy spreads across Asia, especially China, then disruption to manufacturing will be inevitable. “Temporary, one would hope, but hugely disruptive all the same” in the next few months, they wrote in a research note this week.

China is the world’s biggest trading nation and its ability to keep its factories humming through the pandemic has been crucial for global supply chains.

While the outbreak of omicron in China is small compared with its Western peers, authorities are taking no chances. In recent weeks scattered infections of both the delta and omicron variants have already triggered shutdowns to clothing factories and gas deliveries around one of China’s biggest seaports in Ningbo, disruptions at computer chip manufacturers in the locked-down city of Xi’an, and a second city-wide lockdown in Henan province Tuesday.

Henan and Guangdong, which also has an outbreak, are centers of electronics production. If cases continue rising there, it could impact the supply of iPhones and other smartphones, according to Bloomberg Intelligence analysts.

The paradox of China’s aggressive “Covid-zero” strategy is that although it helps contain the virus spread, to do so usually requires significant disruption or lockdowns as authorities limit the movement of people. The repeated mandatory testing of whole cities can interrupt businesses and production, although nothing to the extent seen in places like the U.S., where the omicron wave caused an estimated 5 million people to stay home sick last week.

That risk of disruption for factories is already prompting companies to spread their risk by ensuring they have alternative production facilities, according to Stephanie Krishnan, a supply chain expert at IDC in Singapore.

“We are starting to see companies mitigating risk, seeing where they can increase capabilities for production of different products in different factories so they can shift that around,” she said.

Krishnan doesn’t see an end to the global supply crunch anytime soon and cautions it could take several years for the snarls to unwind. It’s a sobering outlook to start a year that many had hoped would mark the beginning of the end of the Big Crunch which dogged producers and consumers through much of last year.

How China’s control of the virus plays out will ultimately be crucial, said Deborah Elms, executive director of the Singapore-based Asian Trade Centre. Those companies whose supply chains are fully located inside China may be insulated by the country’s mitigation strategy. But that won’t apply to everyone, she said.

“Lots of products in supply chains come from outside China,” Elms said. “Given challenges elsewhere, even zero Covid doesn’t solve all the issues of disruption.”

(Bloomberg)

Lines of trucks are seen at a container terminal of Ningbo Zhoushan port in Zhejiang province, China. (Reuters)

China's Covid crackdown spells supply chain crunch for global economy