Forecasts for global economic growth have deteriorated drastically due to a confluence of factors, Kallanish notes.
The Institute of International Finance (IIF) says the risk of global recession has risen significantly as the Omicron wave in China is more disruptive than previously anticipated, US financial conditions are tightening rapidly, and the Ukraine war persists and could escalate.
The IIF forecasts 2.3% on-year global GDP growth in 2022, with 2.5% and 1% growth respectively in the US and eurozone, while Russian growth should plummet 15%. This leaves little room to avoid an outright contraction of global GDP should downside risks materialise, it points out.
In the case of the eurozone, because the statistical carryover from 2021 into this year is 1.9 percentage points, this is in fact a recession forecast that anticipates falling GDP in the second half of the year, IIF warns.
The rise in real long-term US interest rates is now comparable to the 2013 taper tantrum, IIF observes. “This rapid tightening risks further destabilising the global growth picture, which is already teetering from Russia’s invasion of Ukraine and Omicron’s (re-)emergence in China,” it comments.
Nevertheless, “manufacturing from Russia and Ukraine will likely be relocated to ‘safer’ locations with still-reasonable production costs, especially in the automotive sector where missing parts are already causing disruptions. As a result, the CEE-3 [Poland, Czech Republic and Hungary] and Turkey could benefit from larger FDI inflows over the medium term,” IIF says.
Moody’s meanwhile forecasts 3.1% GDP growth in 2022, with the US and eurozone seeing 2.8% and 2.5% respectively, while Russian GDP is set to fall 7%. Besides Russia, it does not foresee a recession in any other country.
“Several crosscurrents have hit the global economy all at once, and will slow growth more significantly than we envisaged only a few months ago,” Moody’s says. The key factors are the Ukraine war, new lockdowns in China and monetary policy tightening to fend off accelerating inflation. “The rise in prices, especially of essentials, is quickly eroding household spending,” Moody’s points out.
Meanwhile, economies are returning to a post-pandemic normal, which involves reversals of some economic patterns to pre-Covid trends. Households are once again spending a greater proportion of their incomes on high-contact service activities and buying fewer goods.
For Europe, “cuts to the supply of natural gas would force a rationing of energy across sectors, cutting back factory, transportation and other energy-intensive activity, and would plunge the region’s economy into a recession,” Moody’ warns. “A recession in Europe would reverberate throughout the world.”
Adam Smith Germany