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.
After last year’s sudden, deep and a-typical recession, caused by the Covid-19 pandemic, this year has also been a-typical in several respects. Supply bottlenecks and supply disruption have been dominant themes throughout the year, acting as a headwind to growth, both directly but also indirectly, by causing a pick-up in inflation to levels not seen in decades. Under the assumption that the pandemic is gradually becoming less of an issue thanks to the vaccination levels, 2022 should see a normalisation in terms of growth, inflation and monetary policy.
With the inflationary surge in the US showing no signs of stopping, the Federal Reserve is no longer taking a accommodative stance and could accelerate the tapering of quantitative easing. Inflation has also spread to asset prices: real estate and stock prices have climbed to peak levels. Unless the emergence of the Omicron variant radically changes the situation, everything points to a key rate hike in 2022, possibly as early as next summer.
The crisis in the real estate sector, the “zero Covid” strategy in the midst of a resurgent pandemic, and the persistent fragility of household consumption are some of the main risk factors straining China’s economic growth. In the short term, the authorities are expected to cautiously step up monetary and fiscal policy support while maintaining their focus on rebalancing the property market, reducing financial risks and tightening the regulatory environment.
The victory of the Liberal Democratic Party in the October general election allows prime minister Kishida to implement his policies. In November, he presented an unprecedented fiscal package amounting to some JPY55.7trn or 10% of GDP. In 2022, GDP growth could rise to 2.6% after 1.7% in 2021, largely driven by private consumption.
The resurgence of the Covid-19 pandemic and the emergence of the new Omicron variant make the ECB’s task even harder. Although growth should hold at a high level, it is expected to ease, and this trend could worsen, at least in the short term. Meanwhile inflation continues to soar, while becoming more broadbased, and the risk in the coming months is on the upside. Faced with greater uncertainty, the ECB is arguing in favour of patience and constancy while saying it is ready to act in any direction. According to our scenario, which is somewhat optimistic in terms of growth and calls for persistent inflation, the ECB would end its Pandemic Emergency Purchase Programme (PEPP) in March 2022 and begin raising its key deposit rate in mid-2023.
After strong growth in Q2 and Q3, the business climate deteriorated due to supply problems, the increase in prices and the surge in Covid-19 infections. Output is likely to stagnate around the turn of the year. The new government will put the emphasis on social and environmental policies, while fully respecting the fiscal framework, important for Germany. Private consumption will be the major engine for growth in 2022.
Factors hampering growth in the short term are gaining strength (supply chain disruptions, surging inflation, and the resurgence in the Covid-19 pandemic), but the resilience of business sentiment through November as well as numerous targeted measures to support household purchasing power help allay fears. In Q4 2021, we are forecasting growth of 0.6%, although the risk is on the downside. In full-year 2021, growth is expected to average 6.7%. In 2022, it will remain a robust 4.2%, bolstered by the accommodative policy mix, the unblocking of excess savings, the catching-up of the services sector as well as strong investment and restocking needs.
After a modest expansion in Q1 2021, real GDP rose by more than 2.5% q/q in both Q2 and in Q3. This recovery was widespread. In Q3, net exports added 0.5 percentage point to GDP growth thanks to a stronger rise in exports than imports. Thanks to the easing of social restrictions, consumption has further increased, while favourable financing conditions and fiscal incentives have supported investment. During the summer, the recovery expanded to the services sector, which benefitted from higher tourist receipts. Manufacturing production has recovered entirely from the 2020 decline, ending up 2% higher than in Q4 2019. Labour market conditions are not as good as the recovery would suggest.
Despite a rather weak recovery in GDP, the Spanish economy has been much more resilient on the labour market front in 2021. Employment (November) and the participation rate (Q3) are at record levels. Inflation will be one of the biggest obstacles in 2022, the increase in production prices having accelerated markedly this autumn. Support for growth will remain a government priority in 2022. The country will benefit from a larger transfer of European funds that will help finance a record budget of EUR196 billion. The reduction in the government deficit will be again pushed into the background, the authorities mainly betting on economic growth to reduce the deficit-to-GDP ratio.
Q3 Belgian GDP growth came in at 2% q/q, which is well above consensus. GDP thus exceeded its pre-Covid level for the first time since the start of the pandemic. For this year, we estimate the growth rate to reach 6.1% in annual average terms, with a slower but still above-potential growth rate of 3.1% expected for next year. As it stands, the Belgian economy looks to have avoided additional scarring; however, with elevated public debt levels entering the limelight once again, the De Croo government has its work cut out.
Once Covid-related restrictions are lifted, the economy is projected to rebound strongly in 2022, driven initially by household consumption. Next year, the fiscal stance is likely to tighten because of the gradual withdrawal of the special support measures. A major political risk is the possible falling apart of coalition between the conservative ÖVP and the Greens.
Confronted like the rest of Europe by an upsurge in Covid-19 cases, Finland has reintroduced protective health measures that could temporarily dampen its recovery. Estimated at 3.4% in 2021, GDP growth could still reach 2.8% in 2022 according to the European Commission. After taking a reasonable approach to “whatever the cost”, the government is now seeking to consolidate public finances.
The Greek economy has surprised on the upside so far in 2021. Real GDP growth is expected to exceed 7% this year. The unemployment rate has fallen to 13% in September. This improvement has allowed the banking sector to continue its clean-up, with a non-performing loan ratio close to the 20% threshold at the beginning of the summer. Difficulties on the economic, social and banking front remain amongst the most pressing in the European Union. This said, unless there is a further complication on the health front, Greece will go into 2022 on a much better basis than in previous years.
To raise or not to raise interest rates? That is the question facing the Bank of England as inflation accelerates and the number of Covid-19 cases surges again, this time with Omicron, the new Covid-19 “variant of concern”. After rebounding strongly through summer 2021, economic growth has also lost the support of public spending, and is showing a few signs of levelling off.
Faced with the Covid-19 pandemic, Norway managed to minimise the human toll as well as its economic losses. In 2021, the country largely benefited from the rebound in natural gas and oil prices. Activity has already exceeded pre-pandemic levels, the housing market is booming, and the public accounts have swung back into their usual surpluses. One of the very first central banks to raise its key rates, Norges Bank esteems that the current situation is in keeping with the normalisation of monetary policy. Yet the roadmap still depends on the health situation, which like elsewhere in the world, is deteriorating.
Recent data show business and consumer sentiment has peaked and real GDP growth is expected to slow down whilst remaining well above potential. A key factor in this respect is the self-reinforcing interaction between spending, company profits and employment, against a background of easy monetary and financial conditions. In using the popular metaphor, until recently, the economic sky looked quite blue but clouds have been gathering. The message of central banks should become a bit more hawkish, in the US, political disagreement influences the economic agenda of the Biden administration and China is going through a major adjustment phase
On the whole, the US economy has recovered very quickly, albeit unequally, from the loss of business caused by the Covid-19 pandemic. Exceptional Federal transfers have fuelled a spectacular rebound in private consumption, so much so that it is nearly overheating. Faced with a global parts shortage and hiring troubles, companies are having a hard time meeting demand. Prices have come under pressure. For the US Federal Reserve, the time has come to begin withdrawing monetary support. The debt ceiling has just been hit, and major budget bills remain in suspense until an agreement to raise the limit can be reached with the Republicans.
EcoPerspectives is the quarterly review of advanced economies (member countries of the Organisation for Economic Co-operation and Development) and China.
It provides an outline of several advanced economies using indicators for the past quarter and it looks ahead in order to better understand and anticipate the main economic problems of the countries in question.
For EcoPerspectives, economists from the advanced economies team regularly monitor the key economic indicators of selected countries. In particular, our experts use the quarterly forecasts provided by BNP Paribas (for growth, inflation, exchange rates, interest rates and oil prices). Each economist analyses the economic situation of one or more countries, based on the available indicators, in order to see how they change, including the industrial production index, quarterly gross domestic product (GDP) and inflation forecasts, the consumer price index (CPI) and the producer price index (PPI), and employment and unemployment figures. How various stakeholders’ views evolve is also studied and analysed closely (e.g. household confidence and business climate). The author comments on the main factors that influence and determine the economic activity of the country concerned and the economic outlook for the coming quarter.
