Pay the price of war

The global economy is paying a heavy price for Russia’s unprovoked, unjustifiable and illegal war of aggression against Ukraine. Combined with the still lingering effects of the COVID-19 pandemic, the war is slowing growth and adding to price pressures, especially for food and energy. Global GDP stagnated in the second quarter of 2022 and output fell in G20 economies. Inflation persists longer than expected at a high level. In many economies, inflation reached a peak not seen since the 1980s in the first half of 2022. In view of the deterioration of recent indicators, the global economic outlook is darkening.

The four main messages of this Interim Economic Outlook are:

• The slowdown in the global economy is stronger than expected
• Inflation has become widespread
• Inflation will ease but remain high
• A reduction in demand and a diversification of supplies are essential to avoid energy shortages

The slowdown in the global economy is stronger than expected

Despite the boost to activity following the reduction in the number of COVID-19 contaminations in the world, global growth is expected to remain sluggish in the second half of 2022, before decelerating further in 2023 to reach a level of annual growth. by only 2.2%. Global GDP is currently projected to be at least USD 2.8 trillion lower in 2023 than forecast in December 2021, before the war in Ukraine. The costs related to this war are very diverse, but this amount gives an idea of ​​its price on a world level in terms of economic production.

One of the main factors in the slowdown in global growth is the general tightening of monetary policies due to the larger than expected overshoot of inflation targets. The strict confinements in China accompanying the country’s zero COVID policy have also had an impact on the Chinese economy but also on the world. Business suspensions and failures in the real estate market are slowing Chinese growth, which has fallen to just 3.2% in 2022.

Inflation has become widespread

Inflationary pressures are spreading beyond food and energy, with businesses in all sectors of the economy passing on higher energy, transport and labor costs. The amplification of these tensions, already evident in the first months of 2022 in the United States, is now also evident in the euro area and, to a lesser extent, in Japan.

More than half of the products making up the price index are experiencing inflation above 4% in the UK, the US and the euro zone, a sharp increase compared to a year ago with a level more twice as high as the objectives.

The tight situation in the labor market – with unemployment rates reaching or approaching historic lows in 20 years – is boosting wages and helping to mitigate the loss of purchasing power and growth. However, it also contributes to the generalization of inflation. Wage growth has strengthened in many countries, particularly in the United States, Canada and the United Kingdom, but not yet in the euro area.

Inflation will ease but remain high

Given the turnaround in the global economic cycle and the increasingly tangible effects of monetary policy tightening by most major central banks, headline inflation is expected to peak this quarter in most major economies before declining in the last quarter of 2022 and throughout 2023 in the majority of G20 countries. That said, annual inflation will remain well above central bank targets almost everywhere in 2023.

The United States, which began to tighten monetary policy earlier, should be able to bring inflation back to target faster than the euro zone or the United Kingdom. On the other hand, given the diffusion of the recent spike in energy prices throughout the economy and the later onset of monetary policy tightening than in the United States, headline inflation like underlying inflation should remain high in much of Europe.

In the major emerging market economies, the picture on the inflation front is very mixed. Inflation is low and stable in China, while in Brazil and Mexico, strong inflationary pressures should subside and return to the targets set once the rate hikes take effect. In 2023, inflation rates in Türkiye and Argentina are expected to remain at very high levels, although slightly lower than in 2022.

A reduction in demand and a diversification of supplies are essential to avoid energy shortages

A risk of divergence from the Outlook is that the decline in European Union energy supplies to Russia could ultimately generate much greater disruptions than projected.

European Union gas stocks have been increased to nearly 90% of capacity. However, if the European Union does not manage to reduce its consumption, these stocks could, even at this level, prove insufficient to guarantee that demand, during a typical winter, can be satisfied without lowering them. dangerously. Supply shortfalls could widen significantly if non-Russian supplies from countries outside the European Union do not materialize as expected, or if gas demand is stronger due to a harsh winter.

Without sufficient diversification of supply and an orderly reduction in demand, shortages could cause a spike in global energy prices, hurt confidence, worsen financial conditions and require, for a time, require businesses to reduce their gas consumption. Taken together, these shocks could reduce growth in European economies by more than 1¼ percentage point in 2023 compared to the baseline scenario, and cause inflation to rise by more than 1½ percentage points, tipping many of European countries in recession in 2023. Globally, inflation would be strengthened by more than ½ percentage point in 2023, and growth reduced by just under ½ percentage point.

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