According to the updated forecasts listed in SEB Bank’s Nordic Outlook, the global economy continued showing a good level of stability last year. Despite the growing interest rates and high inflation, consumption remains relatively good, as reported by the bank’s economic expert Dainis Gašpuitis.
Because the most negative scenarios did not come to pass, it allows banks to preserve more grounded and optimistic outlook towards the chances of Baltic economies this year and predict minimal growth. A more rapid drop in inflation helps purchasing power and consumption recover more quickly. Eurozone’s perspectives provide for smoother changes for the manufacturing sector and exports. Labour markets will cool down slightly. Wage rise will continue, which will maintain pressure on entrepreneur’s costs.
Latvia will need to organise the flow of European funds to ensure recovery of the construction sector.
The Russian-Ukrainian war will continue having a negative influence over world processes, maintaining increased uncertainty.
Various businesses have benefited from the drop in global supply chain disruptions. Many countries maintain relatively healthy demand, and energy price drop helped reduce costs. As a result, GDP growth in 2022 in most cases may turn out stronger than expected. The chances for 2023 have stabilised.
The savings formed during the period of Covid-19 restrictions have mostly run out, warns the economist. Indexes from recent weeks continued showing that there is a possibility of a light recession at the start of the year: households’ savings will run out and confidence indexes in various economies have gone down to a level that indicates a slight drop in output.
Economic decline was slowed thanks to various corrections performed for GDP growth outlooks in US and Europe.
Despite the short-term problems in China, this country’s growth outlooks are upwards-facing.
The aggressive policy of central banks is one of the reasons why outlooks for 2024 were corrected.
Economic resilience in 2022 helped avoid recession in a situation of rising inflation. Otherwise it would have caused severe consequences for the financial system.
Perspectives of the energy market for the next couple of years have improves, whereas the prices of transports and agriculture materials have gone down. In Europe, especially in Nordic Countries, the general reaction to the inflation is that the possibility of a destructive wage-price spiral is unlikely. But the drop of base inflation may turn out so shallow that central banks will continue their aggressive policies.
Unpredictability of the consequences of aggressive monetary policy is the main negative risk, especially considering the long time lag before the rate changes and the impact on the economy. Before the global financial crisis the US Federal Reserve System (FRS) raised the main interest rate by 4.25 base points in more than two years. Now FRS has done this in less than one year’s time. The speed at which this is being done is close to the country’s austerity policy of the 70s.
In Europe there are similar risks even though it is not expected for the main rate to reach a level as high as the one in US. Nevertheless, inflation maintains actual interest rates, which suggests attracting monetary policy may have less negative effects. This could explain the resilience of businesses and households.
The rapid growth phase could be replaced by a drop of similar size, because the high price growth of spring 2022 will start disappearing from data for twelve months. A tangible drop is possible in sectors that suffered extreme price levels, such as the energy sector. A faster rate of inflation deterioration will help reduce pressure on households, as well as open the way for a more liberal monetary policy and provide support for the growth of the share market.
Protests against Covid-19 restrictions and slower growth convinced China to alter its covid policy. The country reopened sooner than expected. SEB Bank predicts this country’s GDP growth will reach 5.5% this year and 4.9% next year. Expansive fiscal and monetary policy, support for crisis-impacted real estate sector, savings of households and slower consumption during the period of epidemiological restrictions indicate good growth potential. But it will not be a smooth process. The speed of the spread of the virus will increase, which has already caused pressure on healthcare. Although it is too soon to announce victory, there are no new problems for the global supply chain on the horizon.
Energy crisis risks are down. The cooling of the global economy at the end of 2022 caused a rapid drop of prices of oil, coal and natural gas.
The European Union has managed to deal with this emergency unexpectedly well, all things considered.
Nevertheless, the situation in the global fuel market indicates that the supply of resources will remain limited.
The last eight years were a period of challenges for OPEC member states, because production outputs outside the cartel turned out very strong. Now this has changed. In the next five years the market will be in the hands of OPEC once again.
Sanctions will cause a severe drop of oil and gas supplies for Russia, which will result in higher oil prices.
Inflation in Eurozone reached its peak in October with 10.6%. Consumption index’s drop in the future will be rapid, but the average index will remain above 5%. The dropping energy prices will contribute a great deal, but uncertainty will remain – because different types of energy resources have different subsidies, which creates an influence on inflation indexes.
The wage increase in the US private sector slowed down to slightly above 5% over the course of the year. The latest data indicate the growth rate has reached its peak. In a short-term perspective the wage growth of 5% will be enough to open the way for a reduction of interest rates. The number of vacant jobs has already started going down.
SEB Bank outlook: the general annual wage increase in Eurozone will increase by approximately 4.5%.
Most central banks are lose to the end of the period of increasing their respective rates. Inflation has reached its peak, but demand and the labour market both show resilience. But uncertainty about economic offers, especially in regards to labour force, is one of the reasons why central banks remain cautious about the end of the period of growth.
In response to high inflation indexes, the European Central Bank has become more aggressive, including in regards to concerns about wage growth and new fiscal stimulation measures.
Also read: Banks downgrade Latvia’s GDP growth outlook for 2023