Crédito y Caución expects global GDP growth to decelerate to 3.1% in 2022 and 3.0% in 2023. Compared to its April forecast, this represents a downward revision for the coming years of 0.3 and 0.2 percentage points, respectively. Inflation is now running above multi-decade highs, squeezing real incomes and dimming the outlook for consumer spending. Inflation is expected to decline over the next 18 months, although the process is fraught with much uncertainty. This, together with accelerating monetary tightening, is inevitably putting further pressure on economic growth in 2022 and 2023.
The report released by the credit insurer explains that a first factor for the revision lies in the rescaling of the disruptions resulting from the war in Ukraine, which is expected to last longer than expected and whose sanctions could severely disrupt Russia's energy exports. The uncertain evolution of the pandemic is a second factor to take into account. On the one hand, China maintains a zero-tolerance policy that involves large-scale closures for a small number of cases, such as the confinement already experienced in Shanghai for two months, which has caused a strong disruption of the value chain. On the other hand, further economic impacts of the pandemic cannot be ruled out in the United States, the United Kingdom, Germany and France, where the number of cases is rising again.
The report expects oil and gas demand to come under some downward pressure with the economic slowdown and rising prices. However, given the volatile geopolitical environment, volatility will remain high. The EU's intention to replace Russian gas abruptly and rapidly, and Russia's apparent willingness to accelerate this process by reducing supply, causes market disruptions and generates a great deal of uncertainty. The EU will have to source liquefied natural gas (LNG) from other countries, expand its processing capacity, intensify the use of renewable energy and reduce demand through efficiency measures. However, the potential for substitution of Russian gas supply is limited in the short term. A cut in Russian supplies will further increase gas prices in the Asian and US markets.
The rise in commodity prices has softened considerably at the end of the second quarter of 2022 due to the slowdown in global economic activity, which has reduced demand for metals, especially in China. Over the forecast horizon, Crédito y Caución expects metal prices to be 10-15% higher than in 2021, with a slight downward trend in 2023. Food prices were already on the rise before the war in Ukraine, reflecting poor crop yields and higher energy prices. The impact of the war on food prices will only gradually dissipate as production increases in other countries such as Argentina, Brazil and the United States. The result is that prices in 2022 will be significantly higher and relief will not come until 2023.
"What we outline in our forecast is a picture of higher inflation and lower growth, with central banks and, to a lesser extent, governments withdrawing their pandemic support. Compared to our April interim outlook and especially compared to January, risks have increased," the report explains. These risks, predominantly geopolitical, could materialise if the war in Ukraine escalates or if Russia cuts off gas supplies to Europe, leading to an alternative scenario of stagflation.
Read the full report HERE
Source: Crédito y Caución press release