Infrastructure investment gap and hidden inflation

Our first assumption for this year is that we will have much higher growth resulting from pent-up demand once most of the restrictions and the lockdowns have been materially lifted, probably as soon as this spring in the United Kingdom and Israel, and from a vaccine rollout that is faster than expected. Our second assumption is that inflation will show up this year, and will come from the physical lack of logistics after years of underinvestment. 

Covid-19 as a trend accelerator

In many ways, the pandemic has been a trend accelerator, in particular with regard to digitalisation. It has transformed consumer spending habits for good, with consumers swapping the checkout queue for online shopping more than ever before, resulting in a greater share of e-commerce in total sales. Just for the United States, the share of e-commerce has jumped from 11.8% of total sales in Q1 2020 to 16.1% in Q3 2020. In the midst of the pandemic, only digital companies or those able to levy digitalisation were able to protect or, in some cases, even increase their revenue stream; others meanwhile, typically the store next door, were confronted with massive revenue loss due to the introduction of social distancing measures. To get around problems raised by the pandemic, there has been a lot more focus on and investment in online advertising, online systems and delivery from the corporate side, notably in sectors that were lagging behind. All of this is unlikely to change when stores reopen their doors again. The acceleration in digitalisation and online shopping will continue in the coming years, bringing out issues that had until now been overlooked.

One of the key issues that we identify is the lack of investment in infrastructure and logistics devoted to the digital world. While we may believe the digital world could exist by itself, this is a wrong assumption; the digital world does not exist independently from the physical world. It needs all the infrastructure and logistics from the physical world to keep growing and working properly. And if we accept that digitalisation will drive everything and online platforms will become dominant, we need to understand that we have reached the point where the lack of investment in infrastructure to source and build, and in logistics to deliver the products that these successful platforms sell, is becoming a serious constraint that is about to drive cost inflation higher.

Physical constraints driving inflation higher

This is already happening. The physical structure is unable to cope with a sudden and massive increase in demand. With consumers being locked down in their home countries with a massive amount of cash, they have gone on a spending spree for Asian-produced consumer goods. The shipping infrastructure does not have the capacity to handle such a sudden jump in demand, leading to a bottleneck situation where empty containers are stuck in the wrong location and freight costs increase for major shipping routes. We are currently in the unique situation of the highest-ever freight cost rates between China and Europe, and between China and the United States. This is a sign of global trade revival, but it’s also the sign of underinvestment and malinvestment in logistics, which is nothing new.