International economic perspectives have become worse in recent months. The war in Ukraine has significantly impacted development of the global economy and security policy. The new outbreaks of Covid-19 in China further worsen the situation, because authorities refuse to ease their anti-covid strategy.
This is why no quick solutions are expected for ongoing interruptions of the global supply chain, as concluded in SEB Bank’s latest Nordic Outlook.
It is expected for the global GDP to increase by 3% this year, which is more than one percentage points less than what was predicted in January. GDP growth for 2023 is expected to be unchanged – 3.4%. The US economy is expected to increase 2.6% this year and 1.7% next year. Eurozone is expected to grow 2.1% this year and 2.8% next year.
US economy’s perspectives have worsened gradually, which has forced the Federal Reserve Fund implement a tighter monetary policy.
The central bank currently focuses on inflation in spite of lower growth perspectives.
The price rise has expanded because companies forward increasing costs to the consumers. There are signs of overheating on the goods and labour markets. If central banks do not act, there are risks of long-term inflation expectations. Wage rise in the US and UK continues, while in Germany and Nordic countries it remains relatively low. Wages are dictated by the market, and there are signs in the US that it’s close to the peak, because the shortage of labour force and wage increase plans of small companies have dropped.
SEB Bank’s economist Dainis Gašpuitis comments: «We still maintain a soft landing scenario, which is based on multiple positive aspects. New fiscal stimulants to compensate high energy prices, military investments and green course will ensure long-term support for Eurozone’s growth. Savings made by households during covid pandemic will provide support and make the private sector more resistant to increased rates. The debt burden of households is much lower than it was before the global financial crisis. The problems experienced by suppliers, which drive inflation, will go down in time. The service sector continues re-opening. This could reduce pressure on goods and divert demand to sectors that do not face a shortage of supply. It is worth mentioning that actual interest rates will remain low, despite increase of the base rate.»
Read also: War in Ukraine and sanctions cause a drop in freight carried by aircraft in Latvia
Despite the unexpectedly strong inflation, the European Central Bank will act cautiously because Eurozone’s dependence on Russian energy slows growth. ECB needs to attempt to prevent too large a gap in yield of securities of Eurozone member states. The European Central Bank will start acting in July, increasing the deposit rate to 0.25% in 2022 and 1% by the end of 2023. In parallel to increase of rates, central banks will tighten their policies using their balance. But it is hard to predict the effect of these measures.
It is possible inflation rise may turn out stronger and longer, which will require a stronger reaction from central banks.
The possible energy crisis in Europe and China’s economy are additional risks. The potential of growth is limited, but it will be dictated faster than expected normalisation of supply. The risk background is larger than usual, said the economist.
It is expected for Russia’s GDP to drop by 10% this year and by 3% next year. Sanctions combined with a repressive political environment, weak rule of law and widely spread corruption will lead to deep economic stagnation. Even the companies of countries that do not distance themselves from Russia, that sell goods in the US and EU will follow anti-Russian sanctions. The choice between the stagnating Russia and developed western economies is clear to most companies. Russia’s economy has not yet collapsed partially because since 2014 Moscow has reduced its vulnerability for such situations.
The war in Ukraine has caused turbulence on global raw material markets, because Russia is not only a major exporter of oil, gas and coal, but also an equally major supplier of grains, nickel, aluminum, palladium and mineral fertilizers. For example, the shortage of metals cal delay the implementation of the green course, whereas price growth on food products may serve as a source of social instability in many parts of the world. The prices of wheat have doubled and may increase further in the near future. Russia’s isolation will not be easy, because finding alternatives to Russian raw materials will prove a major challenge for countries.
New Covid-19 outbreaks in China will further escalate disruptions in global supply systems. The war in Ukraine and Russia’s situation further worsen the situation.
This way the problems in the transport system and weak spots continue slowing growth and increasing inflation. The situation may start improving next year. In a long-term perspective fracturing of the world into geopolitical blocks will continue. China’s perspectives have weakened. This year’s growth is expected at 5%.
After the initial surge, prices have slightly recovered. This is manly because the US and other countries have started using oil from their strategic reserves, and restrictions imposed on China have reduced demand. Both factors are transient and energy prices will remain high in the foreseeable future. This year Brent crude price will be 106 USD/barrel and 85 USD/barrel next year. Gas prices are also significantly above average levels.
US continues experiencing strong demand, which is pushed by large-scale fiscal stimuli. At the start of the pandemic they were supportable because the monetary policy’s influence started going down. In a time when central banks are rapidly moving towards tighter policies, the situation becomes more complicated. The question is how important the role of fiscal policy really is in preventing inflation shock and higher interest rate.
High inflation slows growth. The state sector’s revenue is more sensitive to inflation than expenditures. For example, even if household consumption volume is down, nominal consumption portion may increase. In addition to positive influence on the budget, this also means a reduction of state debt before GDP. After the pandemic, the focus of the package of stimuli is currently changing. Especially in Europe households and companies receive compensation for high energy prices. Flexibility of the economy is limited despite great needs, because food and energy form the largest portion of the consumption basket when compared to wealthier countries, which further increases tension in society.
Read also: BNN ANALYSES | Record-high inflation for the second consecutive month keeps Lithuanians jittery
At the beginning of the year economies of Baltic States demonstrated strong inertia, which will allow overcoming challenges easier. In the second half of the year experts expect a notable slowing of economic growth with a possible short drop. But economic growth will remain strong this year – 1.8% in Latvia, 0.9% in Lithuania and 0.6% in Estonia. The general mood in the economy will play a major role. It will dictate consumption and investment activity. A successful resolution of Russian raw material alternatives will be a challenge, especially in regards to energy, may help reduce pressure from inflation. One other important aspect is the epidemiological situation in autumn and development of the war situation in Ukraine. If these risks are resolved relatively longer, growth may turn out higher. Next year growth in all three countries is expected to speed up, the outlook mentions.