Germany is one of the Eurozone countries hit hardest by the Russia-Ukraine war, which is leading towards feeble growth prospects and high inflation. German GDP is expected to barely increase by 1.3% in 2022, compared to a Eurozone average of 2.5%. Average annual GDP growth will remain 0.9% below the year-end 2019 level. At the same time, inflation is expected to reach 8.1% in 2022, driven up by high energy prices. Between the minimum wage hike promised by the government and expected wage increases in many sectors, wage growth should accelerate strongly in 2022, but may not be sufficient to offset the inflationary shock.
The French economy is stuck between three developments with different effects: an inflation shock that is denting consumer spending, a negative supply shock (supply constraints in industry) and the lifting of public health restrictions (benefiting growth as of the second quarter, having held it back in the first quarter). Government measures that have limited inflation were unable to prevent negative growth in the first quarter. However, the positive impact of the lifting of public health restrictions and a rebound in purchasing power should allow for a recovery towards positive growth in the third quarter (+0.3% q/q).
In contrast to the previous recessions, the Italian economy has already recovered what it lost in 2020. The carry over for 2022 is 2.6%. In Q1 2022, real GDP rose by 0.1%, with an annual growth rate above 6%. Value added for construction continued to increase, while manufacturing declined and services stagnated. The economic recovery mainly reflects the robust evolution of investment, while private consumption declined, as Italian households remained extremely cautious. Imports rose strongly, bringing the current account balance into negative territory. The economic recovery in 2021 was less intense in the Southern regions than in the Centre-North, thereby widening the gap between the two areas.
After a weaker economic rebound than its European neighbours in 2021, Spain is expected to report solid growth of more than 4% in 2022. Despite the Ukraine war’s impact on inflation and purchasing power, the job market remains on an uptrend, with 186,000 jobs created in the first five months of the year. This dynamic should extend into the summer months with a stronger recovery in tourism, although current disruptions affecting the airlines in Europe could undermine this outlook. Moreover, inflation might not peak until later in the year, since price increases for food and household appliances are currently gaining traction.
With an energy mix comprised of nearly 90% fossil fuels, the Netherlands have been hit by the full brunt of the sharp rise in oil and gas prices since the outbreak of the Russia-Ukraine war. As a result, the Netherlands has one of the highest inflation rates in Europe. Even so, household consumption is resilient, and the majority of companies esteem that business will remain vigorous in the months ahead. Thanks to this strong performance, the government has been able to focus on a limited series of support measures while continuing to reduce the debt of public administrations. Yet the Netherlands also faces another type of inflation that is just as alarming: house price inflation
Belgian GDP grew by 0.5% in the first quarter of 2022, as inflation continues to reach new all-time highs. Consumer confidence took a hit at the start of the Russian invasion, with growth subsequently likely to have come to a standstill. Index-linking of wages as an income-protection mechanism should eventually soften the inflation-induced blow to private consumption, but the international competitiveness of Belgian firms will suffer as a result. Against a backdrop of rising interest rates, fiscal consolidation remains crucial.
After surging above 10% this spring, inflation will be the main headwind hampering Greek GDP growth in 2022. Yet the economy has proven to be resilient so far. Unemployment has been at the lowest rate since 2010, and GDP has rebounded robustly since the end of lockdown measures in 2020. A recession is unlikely this year, especially since tourism is primed for a solid summer season. On 20 August 2022, Greece will officially exit the European Commission’s enhanced economic surveillance programme, which it entered in June 2018. In May, the country also repaid the last of the IMF loans (EUR 1.9 bn) contracted during the 2011 crisis. Eleven years later, Greece is taking another step towards the normalisation of its economic system.
Inflation continues, driven by factors specific to the UK economy. On the one side, we have a labour market with full employment, favouring wage rises. On the other side, we find the UK economy’s exposure to the consequences of the invasion of Ukraine putting considerable pressure on energy prices. Despite increasing its policy rate early, and then building on this with a succession of further hikes, the Bank of England is struggling to control rising prices. The government has little choice but to intervene to bolster household purchasing power. The economy is already slowing, and there is a risk it will worsen.
Denmark stands out for its vigorous economic recovery, which was much stronger than that in the other European countries. The Danish economy quickly returned to pre-crisis levels and even exceeded its pre-pandemic growth trend. Industry is in full expansion thanks to its positioning in high value-added market segments. Yet this dynamic momentum is threatened in the short term by surging inflation and job market pressures. The central bank has not yet begun the process of normalising monetary policy, although it plans to tighten monetary conditions gradually and progressively in the near future.
After being severely hit by the Omicron variant, economic activity picked up again as of February, and the recovery is expected to continue with growth reaching 4% in 2022. Through no fault of its own, Norway is one of the big winners of the Russia-Ukraine conflict thanks to a substantial increase in oil and gas revenues, which are expected to reach NOK 1,500 bn in 2022 (about EUR 143 bn). Although inflation is milder than in the other European countries, the Norwegian central bank has expressed its determination to tighten monetary conditions as much as necessary to break the inflationary momentum. To bring inflation within its target range, NorgesBank plans to gradually raise its key deposit rate to 2.5% by the end of 2023.
The Covid-19 pandemic weakened Indonesia’s economy. Two years after the crisis, real GDP has returned to 2019 levels, but the labour market is still weak, the poverty rate is higher than before the crisis and investment remains subdued. According to the World Bank, the pandemic’s lasting impact on education and the labour market will cost the country 0.1 points of its long-term growth potential. Today, Indonesia must deal with a new unfavourable economic environment as commodity prices have dramatically increased due to the conflict in Ukraine and sanctions against Russia. Although growth is bound to be squeezed by the Ukrainian conflict, Indonesia’s external accounts should remain healthy and inflationary pressures should remain moderate
In recent weeks, the prospect of several ECB rate hikes has caused an increase in Bund yields and, unexpectedly, several sovereign spreads. Beyond a certain point, higher spreads may become unwarranted. Under such circumstances, the ECB might consider stepping in to avoid that its policy transmission would be impacted. Determining whether sovereign spreads have increased too much is a real challenge. Historically, based on a 20-week moving window, the relationship (beta) between the BTP-Bund spread and Bund yields fluctuates a lot, so this calls for taking a longer perspective. Using data since 2013, the current spread is in line with an estimate based on current Bund yields. Clearly, other economic variables should be added to the analysis
The significant contraction of the blue area relative to the dotted area illustrates the magnitude of the shock faced by the Chinese economy since March 2022. The resurgence of the Covid epidemic has led to the introduction of mobility restrictions in many provinces, with the most stringent lockdowns affecting major industrial and port regions, notably Shanghai. Restrictions have depressed household demand and dampened activity in factories, disturbed the transportation and export of goods, and led to supply-chain disruptions in China and abroad.
After an unprecedented contraction in activity in 2020, the strong rebound in 2021 did not allow South Africa to return to its pre-crisis level of GDP contrary to most emerging economies. In 2022, activity should remain subdued and growth below 2% in the medium term. The economic outlook remains largely constrained by the need for fiscal consolidation in order to contain the high risk of debt distress, the tense socio-political climate, and structurally by strong infrastructure constraints, first of which the electricity supply. The shock induced by the conflict in Ukraine is also exerting significant pressures that could make fiscal consolidation efforts difficult
The global economy has been hit by multiple shocks this year: new Covid-19 cases in China, the war in Ukraine, rising interest rates. Financial market behaviour and the US Survey of Professional Forecasters point to mounting concerns about the risk of a recession. These worries come with a cost to the economy and may cause growth to slow down further. Some degree of concern is welcome because it enhances the effectiveness of a restrictive monetary policy. There is a tipping point however, beyond which slowdown fears become self-fulfilling. Addressing these would be difficult if by then inflation has not yet converged sufficiently to target.
The negative prospects for the second quarter of 2022 are no longer a risk as suggested by business surveys, they are now taking concrete shape in Germany. After the very sharp worsening in the trade balance in March (a 4% decline in exports in volume terms and a symmetrical 4.1% increase in imports), it barely improved in April and remains at an extremely low level. According to the Kiel Institute’s real-time forecasts, exports probably fell in May (-1.7% m/m) but will see a slight recovery in June (0.6% m/m). Over the second quarter as a whole, Germany’s trade balance could shrink to its lowest level since Q2 2001.
The latest economic data from INSEE have provided detail on the timing and scale of the purchasing power shock to household consumption, with three figures standing out: the 1.8% q/q fall in the purchasing power of gross disposable income over the first quarter; the revised fall of 1.5% q/q in household consumption (from -1.3% in the initial estimate); and the downgrade in GDP growth to -0.2% q/q, from 0% in the initial estimate.
The deterioration of the business climate surveys continued in May, particularly in the manufacturing sector, even though industrial production held up until April. Output rose 1.6% m/m, to its highest level since December 2007. However, the manufacturing PMI dropped 2.6 points to 51.9 in May, its sixth consecutive monthly fall. The sharp fall in this indicator shows up clearly in our barometer.
In 2021, sales by foreign subsidiaries of Japanese industrial companies accounted for nearly a quarter of total sales. China is the main anchor country, particularly for the automotive industry. Despite this, Japan has retained a larger industrial base than most other OECD countries. The sector accounted for more than 20% of total national value added in 2021. The share of goods exports in GDP has also increased, reaching 16.4% in Q1 2022. This production structure for Japanese companies, based on the complementarity between domestic facilities and foreign subsidiaries, has helped support profits, which climbed to a record as a share of GDP in Q1 2022
Since the start of the year, media increasingly use the word recession and, over the same period, there was a significant increase in Treasury yields. The common driver behind these developments is, to a large degree probably, the more hawkish tone from the Federal Reserve. Unease about recession risk shows up in the latest quarterly Survey of Professional Forecasters conducted by the Federal Reserve Bank of Philadelphia. Recession probabilities across the projection horizon have moved higher and they are now well above what we have seen in the past at this stage of the tightening cycle. Exceptionally high inflation requires aggressive rate hikes to bring it back under control
The global manufacturing PMI continues its sideways movement since March, when it had declined due to the war in Ukraine. May saw a weakening in the US and the euro area, where in particular Italy recorded a considerable decline. In Australia the PMI recorded a big drop. China saw a rebound following the easing of mobility restrictions. In India the PMI has been stable at a high level for several months and Vietnam saw a sizeable improvement in May. The services PMI was down in the US and the euro area, where in particular Germany was confronted with weaker data, although still well above the 50 mark. In the UK, the index recorded a huge drop. Japan is benefiting from better data and in India the already elevated index moved higher again in May.
US GDP growth was revised slightly downwards (-0.1 point) for Q1 2022, bringing the contraction in the annualised quarterly growth rate to -1.5%, contrary to expectations of a smaller contraction of only -1.3%. This correction can be attributed to a lower-than-expected private inventory investment (contribution of -1.1 points) as well as to the smaller contribution of investment (+1.2 point), especially residential investment. These revisions were partly offset by an increase in consumer spending of both goods and services (+2.1 points). Increases in exports and imports of goods cancelled each other out, leaving foreign trade’s net contribution unchanged (-3.2 points).
At its 10 March meeting, the ECB paved the way for raising its key deposit rate, although the timing of the first rate increase remained uncertain at the time: the odds of a September move had declined compared to a few weeks ago and July was excluded, which left December. The wait-and-see approach still seemed appropriate given the increasing downside risks to growth, aggravated by the current inflationary shock, the war in Ukraine and China’s zero-Covid strategy. Yet economic data reported in the meantime, as well as the hawkish tone of several ECB members, seems to have accelerated the tempo. Concerning data, it is the combination of high inflation, a weak euro and relatively resilient growth that has moved forward the lift-off date.
Our different uncertainty gauges are complementary, in terms of scope and methodology. US economic policy uncertainty based on media coverage has eased slightly after a significant increase, reflecting concern about the impact of aggressive monetary policy tightening. In the US, business uncertainty about sales revenue growth has been stable but uncertainty about employment growth has rebounded somewhat, probably reflecting ongoing difficulties in filling vacancies. The European Commission’s uncertainty index, after having jumped following the war in Ukraine, has stabilised.
