ECB: Limited Impact on Potential Output of Declining Global Value Chain Participation

14 February 2022

By David Barwick – FRANKFURT (Econostream) The effect of declining global value chain participation on potential output in the euro area is probably limited, the European Central Bank said on Tuesday.

In a pre-release from the first economic bulletin of 2022, due out Thursday, the ECB said that while supply shortages were first expected to be a transient phenomenon limited in scope, they ‘have been building up over time.’

To the extent that companies modify their supply chains in response, ‘sectors that have greatly benefited from international exposure and globalisation in terms of productivity growth might experience a decline in trend total factor productivity’, the ECB said. ‘All else being equal, this could lead to a trend decline in potential output growth for the most affected countries.’

To be sure, survey data to date suggest that businesses do not expect to modify their supply chains lastingly, the ECB said. ‘However, recent developments in value chains may force them to reconsider their views on this’, it said.

So far, indications that businesses are reorganising themselves and their value chains in reaction to the pandemic remain ‘mainly anecdotal and … not yet broad-based’, the ECB said. The pandemic’s long-term effects of this nature are still uncertain, it said.

Analyses under one scenario based on the expected post-pandemic decline in trade and under another based on the trade decline during the great financial crisis yielded a ‘-0.6% deviation in euro area trade openness, with a large heterogeneity across countries’ and a ‘1.8 percentage point decline in euro area global value chain participation’ with less heterogeneity across countries, respectively, the ECB reported.

‘For both scenarios, the effect of declining global value chain participation on potential output would be of a limited magnitude’, the ECB said. Depending on assumptions, ‘trend total factor productivity would suffer a loss in the euro area ranging between -0.1 and -0.3 percentage points. Potential output would suffer a similar setback.’

Given expected 2.1% growth in the 2021-2023 period of euro area trend total factor productivity, the impact on potential output of declining global value chain participation is thus ‘limited’, the ECB said.