First the pandemic, now the war. Should we expect locusts too?
Valerio Ranciaro, Director General of SACE SRV and Cinzia Guerrieri, Economist at SACE, look at the gloomy risk picture emerging from recent events – just when things seemed to be on the up.
In 2021, the growth of world GDP was in line with consensus expectations, marking a strong rebound (up 5.9%, well above the 3.4% contraction recorded in 2020), which made it possible for GDP to return and exceed the levels of 2019. Despite the actual context still being conditioned by the continuing health emergency, the progressive implementation of vaccination programmes has allowed the adoption of more limited contagion containment measures (compared to the ones adopted at the height of the crisis) which have had a relatively smaller negative impact on global economic activity. There were, however, significant divergences between advanced and less developed countries on the availability and administration of vaccines, which reflected in a strong disparity in terms of the incidence of immunisation of the population, with repercussions therefore on the extent and speed of recovery of GDP.
Global financial conditions remained broadly accommodative throughout 2021 although, towards the end of the year, there was a turnaround in the monetary policy stance in some advanced economies. This was primarily in the US where the Federal Reserve initiated the process of reducing the purchase programme, paving the way for the increase in the reference rate in 2022, and in many emerging countries where monetary authorities have begun to raise interest rates, in a double attempt to counter inflationary pressures and the potential outflow of capital. China has been an important exception. It has instead implemented a moderately expansive manoeuvre.
Also on the fiscal front, [global] fiscal policy has been expansive, with support plans more oriented towards a resilient, inclusive and sustainable recovery thanks to multi-year investments in green and digital infrastructures. World debt (public and private) reached high levels, around $303 trillion in 2021, although it decreased in relation to GDP to 351%.
Two years after the onset of the pandemic, the global macroeconomic context was gradually improving, albeit still differently among countries (as a reflection of the above-mentioned progress of vaccination campaigns). In the base scenario developed at the beginning of this year, characterised by the progressive overcoming of the health crisis, the consolidation of world economic growth and the easing of the imbalances between supply and demand, the acceleration of global GDP was expected to continue in 2022 as well at a sustained pace (up 4.2% according to Oxford Economics), although relatively more contained than last year due to the disappearance of the rebound component.
Rapid change with conflict
However, the international macroeconomic picture has changed rapidly following the escalation of tensions between Russia and Ukraine in February, which resulted in a conflict whose outcomes are currently very uncertain.
Although these two countries have a modest weight on the world economy, at the same time they exert an important influence as global suppliers of some energy raw materials (natural gas and oil), agricultural (cereals and fertilisers), industrial (metals such as palladium and nickel) and inert gas (for example the neon used in the production of lasers in turn used for the manufacture of microprocessors).
The first effects are already visible on the prices of commodities in the financial markets, which are entering a bullish phase already underway since the second half of 2021, with strong price hikes that further fuel inflationary pressures. The increase in production costs together with the reduced availability of some production inputs (as in the case of cereals and metals), the deterioration of the climate of confidence and the increase in uncertainty inevitably affect the growth prospects of world GDP, which have been reviewed downwards significantly, while remaining in positive territory (up 3.4%).
Furthermore, the sanctions imposed by the Western bloc (primarily the US and the European Union) are already generating global effects through financial channels. The increased risk aversion of investors is reflected in a tightening of financing conditions, in a context of normalisation of monetary policies initiated, among other things, by the US Federal Reserve (which has already implemented in March a first rise, of a long expected series, of the reference interest rate) and, albeit more gradually, by the European Central Bank.
At a geographical level, the downward revision compared to the growth forecasts at the beginning of the year concerns both advanced economies (+3.1%, down 0.7 percentage points) and emerging economies (+3.7%, down 0.9 percentage points).
In particular, the eurozone is the one most exposed to the conflict, especially through the energy and commercial channels and GDP is now expected to grow by 2.9% (one percentage point less than the forecasts made before the conflict). For the US, the impact will be huge as well with growth expected at 3.2%. The weakening of the Chinese economy, whose GDP will grow ‘only’ by around 5%, weighing heavily on the prospects for the emerging markets aggregate, is due more to domestic difficulties in the real estate market and the zero-tolerance policy against COVID-19 (while it seems to have been less impacted, to date, by the ongoing crisis in Eastern Europe).
Significant downside risks persist
The risks on the global scenario remain significant and are oriented on the downside, both from an economic and geopolitical point of view. In fact, if the health impacts linked to the pandemic begin to show a progressive, albeit slow, reduction, the difficulties on the front of global value chains are still evident, considering increases in the prices of energy products and the high levels of debt, which undermine stability, in particular in some emerging economies.
In the background, there is also the increase in poverty and social inequalities fuelled by the pandemic crisis and issues relating to the fight against climate change and the challenge of costs associated with the energy transition. Finally, we cannot exclude an alternative worsening scenario based on the hypothesis that the conflict between Russia and Ukraine will continue into 2023, determining further downward forecasts on the growth prospects of the world economy, especially the European one.
- Oxford Economics (March 2022). The estimates by OE are in line with those made by other international forecasters, such as the IMF and OECD. ↑
- Institute of International Finance, Global debt monitor (February 2022). ↑