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The global economy fears the fall

2022-06-19T10:52:59.317Z


Analysts warn of an adverse scenario due to Putin's war and rate hikes, after a record tourist season. The US is already a cause for concern


For two months it has been impossible to find a table in the four Romain Fornell restaurants.

The bustle has returned to Barcelona.

After two years of sluggishness, cruise ships, big concerts and festivals have finally returned to the city.

And the tourists.

The hotels hang the full sign again and the restaurants fill the box again.

It is the prelude to a promising summer.

"The numbers are already above 2019 and the forecasts for the coming months are very good," celebrates Fornell.

He has survived the pandemic crisis and says he has managed to adapt to inflation.

But he doesn't want to anticipate what might happen in the fall.

“We have learned to live day by day,” he says.

By then, new clouds threaten to cloud the economic recovery again,

Formulating economic forecasts has become an impossible exercise.

Even in the short term.

The rebound that should have followed the crash of the pandemic has been fading.

A year ago, the large international organizations predicted a very strong growth in the euro zone, even close to 4%.

The European Central Bank (ECB) has been the last institution to lower it, to 2.8%.

In another era, any economist would think more than twice before pronouncing the word “recession”.

Not today anymore.

Headwinds blow towards Europe from all latitudes, especially from Russia.

The prolongation of the war in Ukraine and the adoption of new rounds of sanctions may sharpen the rise in prices and further damage growth in the euro zone.

If Moscow decides to turn off the gas tap,

Everything indicates that Europeans have already decided to take a break in summer.

In Spain, the high cushion of savings that they still accumulate and the improvement in the labor market —with more indefinite contracts— will allow hotels and restaurants to be filled.

“We are seeing willingness on the part of consumers with savings available to spend.

And among that expense is leisure and tourism.

Everything points to it being a good season,” says Ángel Talavera, an analyst at Oxford Economics.

From the command posts of the EU, the summer in Spain, Italy or Greece is perceived as the balm to compensate for the setback that industry and construction in Germany may be experiencing this quarter.

But expressions such as “black autumn” are beginning to spread among economists.

"Let's cross our fingers," Fornell, the Barcelona restaurateur, manages to sum up.

If nothing goes wrong, Europe —and Spain— must continue to grow.

The influential Ifo institute in Germany expects the European locomotive to grow by 2.5% this year and 3.7% next year.

Its director of Analysis, Timo Wollmershäuer, explains that the war in Ukraine, the energy crisis and the confinements in China have already forced the forecasts for this year to be cut 1.5 points compared to those made at the end of 2021. this

shock

would have hit the German economy in normal times, we would have fallen into recession”, he laments.

The forecasts of all the organizations, however, are full of asterisks and footnotes.

The risks linked to the pandemic are dissipating, but new geopolitical threats are emerging.

"In Europe, the story could be even bleaker than in the United States because of the prospect of a Russian energy boycott," warns Adam Tooze, a historian and professor at Columbia University.

The ECB has outlined an alternative scenario to its central forecasts in which it contemplates a total closure of the tap by Vladimir Putin.

The Kremlin has already blocked supplies to several EU partners, such as the Netherlands and Finland, and has even partially reduced shipments to Germany, France and Italy.

Europe fears, however, that Moscow will go further, with cuts that imply rationing and continue to shoot up prices.

This hypothesis, according to the ECB, already draws a much weaker growth for 2022, of 1.3%, and even a contraction of 1.7% in 2023. Inflation would also become more persistent and would stand at an average of 8 % this year and 6.4% next year.

High prices would eat into household income and consumption would be depressed.

In silver: the much feared stagflation.

Despite its limited exposure to Russia, it would be strange if Spain were not swept up in this dynamic.

The pandemic has shown how quickly any crisis, health or economic, spreads across the planet.

And Europe's main trading partners are beginning to show signs of exhaustion.

In the United States, an overheated economy, this week there have already been two phenomena that have not gone unnoticed by economists.

One: Wall Street entered an unmistakably bearish path after having accumulated losses of more than 20% since its historical peak on January 4.

And two: the interest curve was inverted;

that is, the two-year bonds yielded more than the ten-year debt, which indicates pessimism in the short term.

In both cases, analysts see warnings that a recession is coming.

Almost more value than these two signs has the consensus of economists and businessmen.

And these already speak openly of a recession in 2023. Of course, soft and short.

70% of the economists consulted in a

Financial Times

survey believe so.

"Inflation is above the target and the Federal Reserve must reduce it by raising interest rates and slowing down demand and the economy," says Jonathan Wright, professor of economics at Johns Hopkins University, who coordinated that survey.

The central bank chaired by Jerome Powell wants its aggressive interest rate policy to cause, at most, a soft landing for an economy that quickly recovered from the pandemic and with a very strong labor market.

However, Wright considers it unlikely.

“Given the inflation situation, it is clear that the Fed [informal name for the US Federal Reserve] must tighten financial conditions quickly—and it will—even if the cost is to cause a recession,” he maintains.

Adam Tooze, who highlights this "dramatic change" in expectations, says he is primarily concerned about the US housing market.

“Mortgage rates have increased from 3% to 6% in six months.

By 2023, a price drop is predicted.

US real estate is the most important asset class in the world economy,” he adds.

Added to this is the collapse of the cryptocurrency market, which had already become popular as an investment.

ECB earrings

There is also no good news from China, the EU's other major trading partner and, in turn, a “systemic rival”, in the words of Brussels.

Beijing 's

covid-zero policy

, based on confinements in the face of new outbreaks, continues to prevent the bottlenecks and the great global traffic jam, also responsible for the gallop of inflation, from ending.

The investment bank Nomura expects growth for the Asian giant of 3.3%, modest compared to the frenetic pace of expansion of the Chinese economy in recent years.

And that data may decrease, according to the entity, if the brick bubble that began to be glimpsed with the Evergrande real estate crisis ends up bursting.

Not all the dangers, however, are outside.

The world is also awaiting the resolution that the ECB gives to the dilemma between growth and inflation.

Southern countries accept that rates should be raised, but with great care so that the recovery is not derailed.

Those in the north think that Frankfurt is running late.

“The ECB has yet to admit that it will have to raise interest rates deep into positive territory, above 3% and possibly much higher.

This will slow down the economy.

The war in Ukraine increases the chances of a recession.

It is frustrating to see that the ECB is still dragging its feet,” says Charles Wyplosz, a professor at the Graduate Institute in Geneva.

However, the south of the euro zone, led by Italy, held its breath after the rise in risk premiums by only announcing the first rise in interest rates.

The fear of the big cloud: the debt crisis of 2010, which was also the euro.

Athanasios Orphanides, now a professor at the Massachusetts Institute of Technology business school, was then governor of the Central Bank of Cyprus and a member of the governing council of the ECB.

He believes that the problems that hit the euro zone at the time have not yet been resolved.

“As the ECB tightens policy, we may see a more significant tightening of monetary conditions in Italy and Spain, for example.

That can lead to catastrophic results in those member states, but the whole euro area is going to suffer”, he states.

If all those risks materialize, the big question is how intense that pullback will be.

Lorenzo Codogno, a former Italian treasury secretary and professor at the London School of Economics, believes that, if it happens, the recession should be limited to a few countries and short-lived.

And, this time, Europe has an instrument whose deployment has only begun to support investment: a recovery fund of up to 800,000 million.

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Source: elparis

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