Moody Rating Agency has said that the global economy is being hit from different fronts. First, higher inflation is eating into everyone’s pockets and denting disposable income, and we expect this to weigh on consumption going forward. Second, supply-chain disruptions, combined with higher energy and input prices, are making life hard for manufacturers as they struggle to source components and to absorb the rise in overall costs. Third, aggressive tightening by central banks will only make the situation worse as it will result in tightening of financial conditions for both businesses and households. Fourth, the military conflict, combined with higher inflation, has resulted in a sharp decline in confidence across the board, further putting the brakes on activity. All things considered, the only solace should come from a post-COVID-19 revival in consumer services activities, though this assumes a continued improvement on the pandemic front.
It said that higher inflation, more acute supply shortages, lower sentiment, and higher rates are here to stay. GDP growth for 2022 has been revised down to 3% from 3.2%. Recession risks have increased sharply and revolve around 30%. The invasion of Ukraine is the main culprit, as it has exacerbated global inflationary pressures. Inflation will stay high throughout 2022 owing mainly to higher energy and tradable goods prices, but underlying inflation pressures will also increase. Central banks are on a rapid tightening path. The global economic outlook has darkened significantly since the start of the military conflict in Ukraine, pushing us to lower our GDP forecasts for 2022. We now expect global GDP to rise by 3% this year, down from 3.2% in our March baseline, while growth in 2023 should come in at 3.4%. We downgraded our forecasts for almost all world economies, reflecting a broad-based increase in inflation pressures, significantly tighter monetary policy, and a decline in overall business and consumer sentiment.
It further said that to put this into context, only a few months ago we were more optimistic. We anticipated growth would gain momentum in the second quarter following the Omicron-related hit around the turn of the year, and in line with the expected fading of both global supply-chain bottlenecks and energy price pressures. Granted, global activity was expected to slow this year compared to peak growth of 5.7% in 2021, but this would have been merely a post-rebound normalisation towards more long-term growth rates. Unfortunately, this is nothing but old news as Russia’s invasion of Ukraine turned things upside down. It brought higher global oil, natural gas, agricultural and metal prices, as well as additional supply-chain disruptions. Our forecasts for a fading in cost-push inflation pressures that would support growth thus became null and void, despite the fading of COVID-19-related disruptions and risks. In fact, we are now seeing price pressures strengthen across the globe, and we are expecting they will remain elevated throughout the rest of the year. Russia is one of the world’s major producers of oil and natural gas, while both Russia and Ukraine are major exporters of agricultural and metal commodities. Sanctions resulted in a sharp decline in trade with Russia, while Ukraine’s exports have essentially halted. Market prices for goods—including energy, wheat, sunflower oil, palladium and nickel—have soared, with risk premiums going through the roof given the increased fear of supply shortages.
According to Moody, these price shocks came with incredibly bad timing. Global inflation expectations were on the high side of what is comfortable before the Russian invasion owing to COVID-19 disruptions to supply-chain and labour markets. Indeed, the OECD announced on Tuesday that inflation across its member countries already reached 7.7% y/y in February, its highest in 30 years. Note that these figures cover only the initial days of the military conflict in Ukraine, which means that they don’t yet capture most of the post-invasion jump in prices. All major countries are feeling the pain. In the U.S., inflation has surged to much as 7.9% y/y in February, while in the euro zone it reached 7.5% in March, the highest reading on record. Worryingly enough, inflation surged to as much as 9.8% y/y in Spain and 11.6% in the Netherlands, while the situation is even worse in Eastern European countries such as Poland and the Czech Republic. Inflation in the U.K. was a bit lower at 6.2% y/y in February, but this still represents a 30-year high and, in any case, the CPI headline is forecast to jump above 8% in March or April. Latin America is also battling with surging prices, with inflation nearing double digits in almost all countries in the region. Brazil steals the spotlight, with inflation there north of 10% y/y. Adding to the woes, Asian countries haven’t been spared. For example, inflation is high and rising in India, New Zealand, Thailand, Singapore and South Korea. Even Japan posted modest but positive top-line inflation in February, driven by high energy prices.
