EXECUTIVE SUMMARY
- The Russian invasion of Ukraine has brought back significant headwinds to the global economic recovery and raised wider geopolitical risks. We have cut our global growth forecast to +3.3% in 2022 and +2.8% in 2023, revised on the downside by -0.8pp and -0.4pp respectively. The economic implications will be felt above all in Russia, which will plunge into a deep recession this year (at least -8%), especially after comprehensive sanctions have been extended to the energy sector. Almost two-thirds of our downward revision of global growth is due to confidence and supply chains shocks, with the remainder being attributable to higher commodity prices. Global inflation will also prove higher and stickier (6% in 2022, revised up by +1.9pp) due to higher energy prices longer than expected supply chain disruptions, which will contribute to price pressures in equal measure. While current negotiations between Ukraine and Russia could provide a path towards a ceasefire, further escalation cannot be excluded, resulting in even harsher sanctions and counter-sanctions (including on energy supply). In such an adverse scenario, inflation would soar to 7.0% this year while growth would decline to 2.4% before world enters into a recession next year (at 0.3%). Our economic outlook builds on our first coverage of the Russia-Ukraine crisis as early as 24 February, when we provided an analytical framework for the assessment of the macro-financial impact of the war in Ukraine together with revised forecasts for growth and inflation as well as important asset classes. This report extends on our initial analysis and examines the broader implications of the conflict. Our revisions to our economic outlook refer to our last report in January .
- We expect global trade growth to decline by at least -2pp in 2022 to +4% in volume terms, just below its long-term average. While Russia as an end-demand market is not systemic globally (representing just 1.2% of total imports), the most exposed exporters in Central and Eastern Europe could still incur considerable losses. Russia also exports large volumes of fertilizers, metals (e.g., iron, steel, aluminum, copper, nickel and tin) and food commodities (e.g. wheat). Auto production, particularly in Europe, would be affected by shortages of metals and gases critical to the production of semiconductors and other parts. On the services side, the travel and transport sectors are most exposed. However, net exporters of commodities, such as countries in the Middle East and several Latin American countries, could benefit from higher prices and potential substitution effects away from Russia. The further tightening of sanitary restrictions in China in response to fresh Covid-19 outbreaks could further weigh on trade due to higher input prices and a delayed normalization of supply chains.
- Several key developments could add downside risks to our outlook. As a result of trade sanctions on Russia, oil & gas, wheat as well as certain metals and industrial gases have suffered extreme price volatility due to concerns about supply shortages. Natural gas prices in Europe are likely to remain at high levels due to higher dependency on Russia. However, we expect oil prices to gradually decline again over the next few months amid reduced and adjustments of both demand and supply. In the absence of a price reversal by mid-2022, this inflationary shock through imported prices and prolonged supply bottlenecks would continue to diffuse into overall prices and activate a wage-price loop, especially in the UK and France. In addition, renewed Covid-19 restrictions in China could prolong pressures on supply chains and producer prices. We could also see rising volatility around the normalization path of monetary policy in the Eurozone and the US as both central banks embark on rolling back their accommodative stances despite rising concerns about growth. (Geo-)political risks other than the Ukraine war also need close monitoring, including US-China tensions and elections in France and Brazil.
- In light of the significant damage to real activity, fiscal and monetary policy decisions will be critical. Most EU countries have extended (and adopted further) fiscal measures of at least 0.6% of GDP on average to help vulnerable households and firms cope with energy inflation. We expect fiscal policy to continue to play a key role over the near term, and to partly mitigate the impact of higher energy prices on inflation and on consumers’ disposable income. In our adverse scenario, potential fiscal support could more than double (1.5% of GDP). In the case of our adverse scenario materializing, countries may be forced to intervene to control prices and, in a more extreme case, administer scarce supplies. Despite the continued hawkish shift of the monetary stance in the US and the Eurozone, monetary policy normalization in advanced economies will be slightly delayed if central banks become increasingly concerned about slowing growth. In emerging markets, central banks will continue to fight inflation and currency depreciations through further rate hikes, dampening the growth cycle even further.
- In global markets, higher uncertainty has resulted in significant equity and bond market volatility. Under current conditions, we expect continued monetary normalization to stabilize real rates and support equities (on the back of still strong corporate earnings expectations) while long-term nominal rates in advanced economies remain contained by safe haven flows, increasing recessionary concerns and some reversal in spiking inflation expectations. This should also slow current credit spread widening, with investment grade names consolidating at 115-120bps until the end of the year. But in the adverse scenario, equity markets will sharply correct (down by 13-14% until end-2022), safe haven flows will lower benchmark long-term sovereign rates (with the 10-year German Bund at -0.35% and the 10-year US Treasuries at 1.2%) while credit spreads widen to 180-190bps but remain range-bound, thanks to central bank asset purchases.
