The post-crisis recovery remains robust but continues to be uneven, with a rising divergence between advanced and emerging economies. Euler Hermes analysts expect omicron-related uncertainty to shave off (only) up to -0.3pp of GDP growth in advanced economies in Q1, but to increase disruptions in terms of labor and global trade.
Advanced economies will continue to generate more than half of global GDP growth (+2.2pp in 2022 and +1.6pp in 2023) while emerging markets will lag behind – for the first time since the crisis global financial situation. Our 2022 GDP forecast remains broadly unchanged, with the Eurozone and the US expected to grow by +4.1% and +3.9%, respectively, while growth in China slows to +5.2% due to ongoing disruptions in the real estate sector and the government’s focus on financial stability. China’s lowest contribution to global GDP growth since 2015 is likely to have negative spillover effects on emerging markets whose recovery will be more superficial compared to previous crises.
We expect Emerging Europe real GDP to expand by +3.3% in 2022 and +3.4% in 2023 (after +5.6% in 2021). Fourth waves of Covid-19 cases hit Emerging Europe in Q4 2021 and are ongoing in Czechia, Slovakia, Hungary, Croatia, Poland, Turkey, and Russia (ordered by size of incidence), though abating elsewhere. Lockdown measures are likely to remain relatively low to moderate, significantly less stringent than during earlier waves.
Inflation is expected to peak in Q1 2022, before gradually retreating thereafter. Monetary policy will continue to be tightened as it has been somewhat behind the curve, especially in Central Europe. The Romanian RON and the Hungarian HUF are somewhat exposed to taper tantrums affected by the restrictive practices of the national banks, due to the margin of freedom of the fiscal policy that differs against the background of the increase of the level of the public debt. Policy support will be phased out through economies with moderate debt (e.g. Czechia, Poland, Slovakia, Russia) may continue, if and as needed. At the same time, EU members will benefit from NGEU funding, with an impact of +0.25pp on annual real GDP growth in 2022-2023.
“In the last months of 2021, the Romanian economy recovered from the boom lost in the previous quarter, returning to annual GDP growth of about + 7%, in line with previous forecasts. Of course, the basic effect must be taken into account when comparing with the year 2020, alternating a negative effect with a positive one (if we remember the abrupt return in the third quarter, followed by a slight increase or near-stagnation in the fourth quarter of the beginning pandemic). Surprising is that inflation appeared suddenly but in line with the title of the film above. Initially, fears of an inflationary outlook were underestimated as a temporary phenomenon and at the same time secondary to the economic recovery, following sustained efforts to combat the economic effects of the pandemic in the first quarters of 2020. Although the inflationary high could materialize in the second quarter of this year, with the lifting of state support measures related to high energy costs, the slowdown inflation in the second half of the year is based on some optimistic assumptions or uncertain scenarios.”, said Mihai Chipirliu, CFA, Risk Director Euler Hermes Romania.
The first scenario refers to a record agricultural production, at least in the most important segments (wheat, corn but also others), which contributes to a slowdown in the increase of the prices of the related products in the summer-autumn months. Recent history last year shows that the reverse can happen even with good production, if the domestic consumption infrastructure is not sufficiently developed. The second scenario considers the positive effect that the funds coming from PNRR could bring to the economy and the construction sector in particular. The way in which these programs will be implemented in order to produce the desired effects in conjunction with the necessary workforce blockages and the avoidance of new pandemic outbreaks (not to be ignored in the case of Romania) should not be neglected.
Last but not least, economic growth, which is expected to exceed 4% in 2022, could keep the National Bank “hostage” to its express mission of keeping prices under control. The drastically unpopular move to raise monetary policy interest rates to at least 4-5% from the current 2% level could be delayed, creating the potential for a surge if the positive effects hoped for above are not met. Under these conditions, the assumptions most likely to be met seem to be to maintain the undercutting pressure on the national currency (while maintaining a generous current account deficit) and to worsen the conditions of access to sources of financing. At the state level, the latter effect could lead to late payments to suppliers, with a chain effect on the economy. At the private level, bank loans would become more expensive if not more difficult to access, adversely affecting supplier credit.
Global trade will be disrupted by labor and supply chain bottlenecks, amplified by omicron. Global trade is projected to increase by + 5.4% in 2022 and + 4.0% in 2023. In the short run, the omicron outbreaks will keep disruptions and cost pressures high. During the next two to four months, we expect some lost value-added in hard-hit sectors with low telework possibilities and higher supply chain driven-inflation due to production shortfalls in China to account for about one-third of elevated inflation at 1.5pp to 2.0pp in the Eurozone, the US and the UK. But we still expect a turning point during the second half of this year due to: a cooling of consumer spending on durable goods, given their longer replacement cycles and the shift towards sustainable consumption behaviors, a lower input shortages as inventories return to (or even exceed) pre-crisis levels in most sectors and a shorter delivery times as higher capacity eases shipping constraints.
However, as in the Don’t Look Up film, which was borrowed for this report, the current growth momentum could prevent economic analysts from looking optimistically at the current recovery phase. Advanced economies will continue to generate more than half of global GDP growth (+ 2.2 pp in 2022 and + 1.6 pp in 2023), while emerging markets are lagging behind in the pace of global recovery – for the first time of the GFC. This divergence is expected to continue in the medium term, as still low vaccination rates will continue to expose the global economy to high volatility and recovery delays due to the risk of further developments of the Covid-19 variant.
However, there are a few exceptions: countries strongly reliant on energy imports (J-curve impact) continue to see a widening of their current account deficits compared to 2020. In Africa, Tunisia, Morocco, Egypt and Burkina Faso will see current account deficits only improve slightly in 2022 after deteriorating in 2021.
In Emerging Europe, most countries will post current account surpluses or small deficits, with the exception of Romania, where a very loose monetary policy stance has caused rising imbalances. In the Middle East, external balances have improved, thanks to improving terms of trade from higher oil prices despite elevated deficits in Bahrain, Jordan and Oman. In Emerging Asia, India, Indonesia and the Philippines are the only countries expected to post current account deficits. A deterioration is expected in the coming few years, but the deficits are not likely to exceed 2% of GDP by 2023 in all cases.
Inflation is likely to decelerate this year as the recovery becomes entrenched, mainly reflecting the phase-out of transitory factors and declining energy prices in H2. The ECB and the Fed still deem rising inflation to be non-structural but acknowledge that it is now lasting longer and has a more uncertain future path than initially expected. We continue to expect pervasive supply-demand imbalances to keep inflation high until the end of the first half of 2022 in both advanced and emerging markets. Inflation is likely to decelerate this year as the recovery becomes entrenched, mainly reflecting the phase-out of transitory factors, fading catch-up effects of goods demand and declining energy prices during the second half of the year.
The fiscal impulse in Europe will be stronger than in the US this year but diminish quickly as most countries start their consolidation path. Most emerging market countries are reducing budget deficits and re-building fiscal space, but commodity exporters remain vulnerable to slowing external demand from China.
Despite negative real purchasing power, excess household savings will continue to support consumption in 2022-23, notably in Europe. Despite the renewed Covid-19 outbreaks, pent-up demand that turned into additional consumption reached EUR20bn in Italy (+1.2pp of GDP) and EUR5.4bn in the Netherlands (+0.8pp of GDP) in 2021. In France, Belgium and Germany, the release of pent-up demand during summer boosted GDP by about +0.5pp. We expect consumer confidence to remain positive and broadly unchanged as the fear factor has reduced significantly. While the saving rate reached its pre-crisis level in the US at end-2021, it remains +6pp above at 19% in the EU.
With regard to monetary policy, current inflationary pressures in advanced economies imply a slightly more aggressive monetary stance, without a fundamental change in the expected growth cycle. While rates are already rising in key emerging countries, central banks in advanced economies have been cautious about withdrawing monetary incentives. Euler Hermes analysts expect the Fed to begin a two-year tightening cycle in the second quarter. The recent rise in US long-term yields indicates that markets anticipate a more aggressive monetary position, which has also increased price volatility in bond markets.
The gradual increase in rates will continue to provide a benign but increasingly fragile environment in the capital market. Unchanged or even lower risk premiums, declining real interest rates and excess savings have supported favorable financing conditions and helped risky assets outperform, while fixed-income assets have struggled against inflationary expectations. growth. However, the positive risk sentiment underlying high historical stock market assessments comes with increasing market volatility and remains dependent on continued growth dynamics and the phasing out of crisis-related policy measures.
Fiscal consolidation is underway
While the fiscal impulse in most countries is diminishing, the US has slowed fiscal consolidation while Europe will begin structural tightening only next year. Chinese authorities’ policy stance has shifted towards easing to support domestic demand and mitigate the impact from the real estate market. Most EMs have improved their fiscal position due to higher government revenues, resuming remittances, export revenues and capital inflows. In 2021, budget deficits narrowed in almost all EMs compared to 2020, except for Nigeria, Tunisia, Czechia, Slovakia and Latvia, and several emerging Asian economies, though most of the latter group and the three EU economies have sufficient fiscal space. However, current budget deficits, the materialization of contingent liabilities (from state-owned enterprises and state guaranteed loans), but also increasing debt-service costs in an environment of higher interest rates, will drive public-debt accumulation. Argentina and Brazil in Latin America; Tunisia and Ghana in Africa; Bahrain, Jordan, Oman in the Middle East and Sri Lanka, Pakistan, the Philippines and India in Emerging Asia will be debt sustainability hot spots in 2022.