By Liza Van der Merwe, Guy Finny and Corbet Anderson, Deloitte

A New Zealand–first index provides a simple but comprehensive view of the status of the nation’s supply chains, helping ensure they support the delivery and maintenance of New Zealand’s infrastructure.

As a trading nation, Aotearoa New Zealand imports material to build and deliver infrastructure. This means the sector is heavily reliant on well‑functioning, resilient supply chain networks. When these networks are not performing, material and equipment shortages result in cost escalation, which leads to the delay, and even cancellation, of infrastructure projects, impacting economic growth and prosperity.

The COVID-19 pandemic highlighted the impact of disrupted supply chains, with construction costs skyrocketing by more than 41 per cent over 2019 to 2023, in part due to material shortages caused by strong demand globally, and major producers and shipping lines prioritising larger economies over New Zealand. The global supply chain also struggled to meet demand, which resulted in long lag times as shipping capacity came back online, causing dramatic increases in freight prices – further increasing costs.

Policymakers and industry have become more interested in how supply chains impact the economy; however, New Zealand has lacked a holistic measure of supply chain health: that is, a measure that assesses the prevalence of supply side constraints in New Zealand’s sectors and for our key trading partners. To address this gap, we have developed the Deloitte Access Economics Supply Chain Health Index (DAESCHI). 

Introducing the DAESCHI

The DAESCHI is unique in that it provides a monthly snapshot of the state of supply chains in, and affecting, New Zealand, whereas most indicators are globally focused and from the perspective of a major economy.

The construction of the index is similar to the Global Supply Chain Pressure Index (GSCPI) maintained by the Federal Reserve Bank of New York, which provides a US view of global supply chains and is the current standard measure of supply chain health. The unit of measurement is ‘standard deviations from the mean’. Essentially, a value above zero indicates higher than normal capacity constraints, while a value below zero indicates lower than normal capacity constraints. The development of a New Zealand supply chain health indicator enables benchmarking against both our own performance and that of major economies. Additionally, it helps us to identify the economic dynamics that both drive and result from limitations within the supply chain.

Ocean freight rate hikes

Recent hikes in ocean freight rates are generating a new wave of supply chain pressures for New Zealand. Volatile and elevated shipping costs could create heightened supply chain uncertainty in New Zealand, which is a risk that importers and exporters should be monitoring closely.

The latest update of the DAESCHI suggests continuing and more pronounced pressure on the global supply chains that matter most to New Zealand’s economy, with associated impacts on inflation.

As illustrated in Figure 2, the recent rise in the DAESCHI is largely attributable to a sharp increase in the Shanghai Containerised Freight Index (SCFI), an input into the DAESCHI that is a measure of sea freight rates across the most used trade routes from Shanghai to 13 global regions, including New Zealand.

The rapid increase in the SCFI comes as a result of multiple global shipping lines having elevated spot rates across major trade routes since mid April, although these have slightly improved recently. Spot rate increases reflect a mix of demand and supply side pressures on freight rates. These pressures come from shippers frontloading prior to the international peak season, ongoing congestion in ports in Asia (including Singapore and China) and the Mediterranean, and tensions in the Middle East. Maersk recently estimated that due to longer routes avoiding the Red Sea, there was a 15–20 per cent reduction in available industry-wide capacity in the second quarter of 2024. Additionally, avoiding the Red Sea has resulted in a 40 per cent increase in average fuel costs on affected routes. While container line schedule reliability has been improving, it is still significantly worse than it was last year, with the May month-on-month figures being 11 per cent lower than its 2023 counterpart at 55.8 per cent. The outcome of all these factors is an increase in prices. 

DAESCHI is comprised of other inputs, which have remained relatively stable since our previous update in March. These inputs include Purchasing Managers’ Index (PMI) data from New Zealand and our major trading partners, as well as other transport cost inputs. Domestic transport costs have remained stable for all modes of domestic shipping. International and domestic PMIs have showed relatively little variation, with some exceptions. 

Since January, the manufacturing PMIs in New Zealand and Australia have been consistently reflecting poor growth in the manufacturing sector, with the Australian PMI showing more variation, but not enough to have a material impact on the overall index. China has held PMIs close to the 50 baseline since January, reflecting average manufacturing growth. The United States has held PMI values consistently at or above the 50 baseline, reflecting strong growth. Most recently, July saw the SCFI decrease slightly from its June peak, while the DAESCHI increased 0.07 points. This is likely the result of the aforementioned lacklustre performance of trading partner PMIs and shipping costs remaining at a high level, despite the drop. The stability of the other inputs of the DAESCHI underline that movement in the SCFI is the key driver to the current spike.

A forward indicator of tradeable inflation

Tradeable inflation refers to price increases for goods or services for which prices are determined by overseas factors (i.e., they are imported or compete against imported goods or services). When the DAESCHI is plotted against tradeable inflation shifted forwards two quarters (i.e., the DAESCHI today against tradeable inflation in six months’ time), it appears to be a forward-looking indicator for tradeable inflation.

We estimate that one standard deviation increase in the DAESCHI translates to a 211-basis-point increase in the level of annual tradeable inflation in six months. Given this increase, the uptick in the DAESCHI creates a downside risk to the Reserve Bank of New Zealand’s goal of bringing inflation within its one per cent to three per cent target band. This illustrates how the DAESCHI is a useful tool to monitor supply chain health and assess risks posed to the broader economic outlook.