The resilience of the global economy is tested by multiple shocks: rising Covid-19 infections in China, the war in Ukraine, the huge increase of several commodity prices, the prospect of aggressive monetary tightening in the US. The significant carry-over effect from last year is an element of support when assessing the outlook for annual growth this year. In addition, the drivers of final demand were supportive at the start of the year and in many cases still are. High inflation is weighing on consumer sentiment in the US and the Eurozone but fortunately, thus far, employment expectations of Eurozone companies remain at a very high level and in the US, the labour market remains very strong
With inflation soaring, the US Federal Reserve announced that it would accelerate the process of normalising its monetary policy. Held near the lower zero bound until March, the key policy rate should rise to roughly 2% or even higher by the end of the year. The Fed will also reduce the size of its balance sheet. Operating at full employment, the US economy seems to have recovered sufficiently from the health crisis to pass muster. Yet it is still sensitive to credit conditions and is not immunised against the impact of the war in Ukraine.
After a strong start in 2022, China’s economic growth slowed in March. Headwinds are expected to persist in the very short term. Firstly, the rapid surge in the number of Covid-19 cases has led many regions to impose severe mobility restrictions. Secondly, the property market correction continues. Thirdly, producers and exporters will be affected by the impact of the war in Ukraine on commodity prices and world trade. The Chinese authorities are bound to accelerate the easing of economic policy.
While the US Federal Reserve has begun raising its policy rate, the Bank of Japan continues to pursue a very accommodating monetary policy. The sharp depreciation of the yen leaves the BoJ less manoeuvring room to pursue its yield curve control policy. Some adjustments in its policy are expected. Economic support – both monetary and fiscal – will be maintained in 2022 in an environment that is especially tough for Japanese industrial companies, hard hit by global supply chain disruptions and the economic slowdown in China.
The war in Ukraine compounds the ECB’s task of balancing the fight against inflationary risks with the need to support growth. At the monetary policy meeting on 10 March, inflation was the predominant concern and the central bank announced that net securities purchases under the Asset Purchase Programme (APP) would probably end in Q3. This paves the way for the first increase in the key deposit rate, although the timing of the move is still highly uncertain. The inflationary shock is spreading while growth faces ever greater threats. Even so, pre-existing cyclical momentum, excess savings, investment needs and fiscal support measures should all help ease the risk of stagflation.
Of the Eurozone’s four major economies, Germany has the least positive growth outlook for 2022. Its economy is expected to grow by around 2% this year, whereas we are forecasting around 3% in Italy and France, and around 5% in Spain. Germany also has a lower Q4 2021 growth carry-over, greater exposure to the economic repercussions of the war in Ukraine, and pre-existing supply-chain problems in its manufacturing industry. The fall in the ifo index in March, particularly the business expectations component, illustrates well these headwinds, and this decline serves as a recession alert.
Inflation continued to rise in early 2022 to the point that it began to erode household confidence in March. These purchasing power problems foreshadow a decline in consumer spending. With fiscal support measures limiting the increase in inflation (by nearly 2 percentage points in April), growth is expected to remain slightly positive (0.3% in Q1 and 0.1% in Q2 according to our estimates).
In Q4 2022, real GDP rose by 0.6%, after having increased by 2.7% and 2.5% in Q2 and Q3 respectively. This slowdown was widespread. Manufacturing stagnated and services suffered from the upsurge of Covid-19 cases. Uncertainty is fostered by inflation which turns out to be more persistent than expected. In March 2022, the consumer price index rose by 6.7% y/y. The deterioration of the economic environment has not affected the labour market yet. In the three months to February 2022, employment increased by 100,000 units almost completely recovering the pre-pandemic level
Although Spain is not the European country with the highest “structural” exposure to the war in Ukraine, it has been hard hit by the energy price shock. Inflation will certainly exceed 10% year-on-year this spring. Higher petrol prices have triggered protests that have spread across the country, disrupting economic activity even though the impact on growth should be modest. Job creations were still resilient in Q1. Household confidence as well as business expectations of future orders both dropped sharply with the outbreak of the war in Ukraine, which will have an impact the dynamics of hiring. The recovery of the tourism industry will partially offset the loss of consumer spending due to the erosion of household purchasing power in Spain.
Belgian GDP grew by 0.5% in the fourth quarter of last year, full-year growth amounting to 6.1%. Having completed a full recovery to pre-covid levels faster than expected, a gradual slowdown from above-potential growth was our base case scenario, even though (energy-)prices continued their upward trajectory and labour market pressures built up. The war in Ukraine will further derail these prospects. As a consequence, we lower our outlook for growth by 1 pp and increase that for inflation by more than 2 pp.
The large victory of António Costa’s Socialist party in February’s legislative elections provides some welcome political stability in the current economic environment. Even though the inflationary shock in Portugal is not as strong as in most of the European countries, and despite support measures introduced by the government, confidence surveys declined sharply in March. It remains to be seen how much this deterioration will alter hiring dynamics. So far, the job market is still on a positive trajectory, with an unemployment rate this winter close to the levels reported in the early 2000s.
Sweden has bet heavily on renewable energy sources, a strategy that is now paying off at a time when oil and gas prices are soaring. Although accelerating, Sweden’s inflation rate is still one of the lowest in Europe, at a little more than 4%. For Swedish households, the resulting loss of purchasing power has been mild, and partially offset by government support measures. But that is not the biggest worry: by invading Ukraine, Russia has shifted Swedish public opinion and rekindled the debate about joining NATO.
Thwarted since the beginning of the year by a strong surge in the Covid-19 pandemic, the economic recovery is now threatened by the repercussions of Russia’s military offensive in Ukraine. Given its geographic location, Finland is highly dependent on Russia for its energy imports, and its energy bill has already risen considerably. After reporting GDP growth of 3.3% in 2021, Finland is unlikely to meet the European Commission’s 2022 forecast of 3%.
The time has passed for unlimited fiscal and monetary support in the UK, and priority is now being given to reducing deficits and lowering inflation. To counter the shock triggered by Russia’s invasion of Ukraine, which promises to further increase the energy and food bills of UK households, the government’s measures to boost purchasing power seem to be rather mild so far. Consequently, we foresee a significant economic slowdown in 2022.
