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The world economy is deflating: this is the coming crisis


Inflation has upset all plans. The increases in interest rates will bring, at the very least, a notable deceleration in the pace of growth

In recent months the world has experienced a chain of events that have significantly changed the economic outlook.

Last October, during the presentation of its autumn outlook, the International Monetary Fund (IMF) stated that "the global recovery is underway despite the resurgence of the pandemic."

Then, the body chaired by Kristalina Georgieva forecast global growth of 4.9% in 2022. In January of this year, however, its projection for world GDP was lowered to 4.4% and in April it was cut even further, leaving it at 3.6%.

“The war in Ukraine has triggered a humanitarian crisis that requires a peaceful solution.

At the same time, the economic damage inflicted by the armed conflict will cause a significant slowdown in growth”, recognized the IMF in its


outlook .

As if it were one of those compositions made with dominoes, Vladimir Putin's decision to enter Ukraine with blood and fire has destabilized the rest of the economic board.

Inflation —which had already woken up at the end of 2021 due to the bottlenecks caused by the awakening of demand after the restrictions imposed by covid-19— has run amok to levels not seen in four decades, mainly due to the sharp rebound in energy costs.

What was initially seen as a transitory situation has taken root as the armed conflict stalls and the dreaded second-round inflationary waves arrive.

Wet paper

Drop the inflation token, the next piece in line was interest rates.

Last year, the main central banks drew a roadmap for the withdrawal of stimuli after two years with negative interest rates and purchases of public bonds at close range to give the economies assisted breathing after the pandemic shock.

That strategy based on gradual increases in the price of money —first in the US because it is in a more advanced phase of the cycle— and accompanied by a gradual reduction in its bulging balance sheets, became a dead letter on February 24 when Putin tightened the red invasion button.

Both the Federal Reserve and the Bank of England and the European Central Bank have been forced to give a sharp turn at the helm to accelerate rate hikes with which they try to stifle inflation.

In a world addicted to liquidity since the Great Recession triggered by the 2008 financial crisis, a much tighter monetary policy than anticipated just a few months ago is a blow to growth prospects, especially at a time when The great engine in recent years for world GDP, China, is facing notable imbalances in its economic model, to which is now added a risky covid-zero policy.

At the moment, the consensus of analysts only speaks of the fact that we are facing a significant slowdown in the pace of growth —the latest IMF projections for April are already out of date—, but few venture to mention the cursed word: recession (technically , two consecutive quarters of negative growth).

However, the scariest material there is, money,

he doesn't have them all with him.

Stock markets, which are usually the canary in the mine due to their ability to anticipate trends, have accumulated notable falls in the last two months.

The Ukraine war has already knocked down two chips (inflation and interest rates) and now points to the next one (growth).

Each region has its own peculiarities.

In the following texts we analyze the strengths and weaknesses of the four major economic zones.

Nord Stream 2 gas pipeline in Lubmin (Germany).

Michael Sonn


The euro zone walks a tightrope again


The European economy is walking along a narrow gangway trying to maintain its balance in the face of the onslaught of two forces: on the one hand, the one that prints a virulent inflation spurred on by the rise in energy prices.

And to the other, that of a rapid slowdown in activity.

Both gain more intensity as the invasion of Ukraine continues, which once again blurs the exit line from the crisis caused by the pandemic and delays full recovery in countries such as Spain and Germany compared to the end of 2019. Everything indicates that the Southern Europe is preparing to shine this summer with its coastline populated by full signs after two years of restrictions.

However, the recovery can skid again in any of the curves that it may come across in the autumn: the escalation of the war conflict,

the bottlenecks created by the Beijing lockdowns or the tightening of monetary policy.

The European recovery fund, endowed with 800,000 million until 2027, stands as the great buffer in the coming months.

The invasion of Ukraine immediately hit economic activity in the euro zone.

The countries of the single currency started the year with an advance of 0.3%, according to Eurostat.

In Spain, which in the final stretch of 2021 had been expanding by more than 2%, that step forward was even one tenth lower.

The latest IMF report, from last April, forecast GDP growth in the area of ​​2.8% for this year and 2.3% for the coming year.

Among the large economies of the block, Spain stood out, with an expansion of 4.8% in 2022 and 3.3% in 2023. With these forecasts in hand, it would be difficult to mention the feared stagflation.

However, those numbers represented a reduction of 1.5 points in the growth forecast for this year and an increase in average inflation to 5.3%.

And since then,

Waiting for a promising summer, many indicators continue to deteriorate.

This is demonstrated, for example, by the latest Purchasing Manager's Index (PMI), a survey conducted among managers of hundreds of companies.

“June surveys point to a further slowdown in the services sector, while industry appears to be falling.

With extremely strong price indices, the euro zone appears to have entered a period of stagflation,” says Jack Allen-Reynolds, an economist at Capital Economics.

“Everything indicates that we are going to have a good summer, but in September it can change.

We are going to a stage in which we are going to have higher prices and weaker growth,” says María Jesús Valdemoros, a professor at IESE.

The main risk to the recovery is a complete and widespread shutdown of the gas tap by Vladimir Putin.

The ECB estimates that this would hamper economic growth in the euro zone, so that it would grow only 1.3% in 2022 and contract 1.7% in 2023. And inflation would soar from 8% this year and from 6 .4% the next.

That situation seemed unimaginable a few months ago.

However, just a week ago the German government was forced to raise its alert level due to the forecast of not being able to fill the gas tanks by autumn.

And therein lies the main fear of Frankfurt and Brussels: that Germany enters a recession and drags down the rest of the partners.

The influential economic institute Ifo does not foresee that this extreme will be reached,

but remember that all the blows received as a result of the war in Ukraine and the confinements in China are going to cost Germany 1.5% of GDP.

In a normal year, the agency maintains, the country would have entered a recession.

Faced with this situation, the ECB has debated between the dilemma of raising rates despite the risk of strangling growth or maintaining a more lax policy with the threat that prices continue to skyrocket.

Now it has finally been decided to curb net debt purchases and raise interest: 0.25% in July and probably 0.50% in September.

For the hawks, the Eurobank is too late, especially when the rest of the central banks have been raising rates for months.

The pigeons, with the memory of the untimely rises of former ECB president Jean-Claude Trichet, fear that a hasty increase will cause an economic slowdown, especially if there is yet another exogenous blow, whether it comes from Moscow or Beijing.

The reaction of the markets to the announcement of the increases, which punished the risk premiums of the countries of southern Europe,

raised the ghosts of another sovereign debt crisis.

For now, the ECB has managed to satisfy them with the announcement of a new instrument dedicated solely to containing risk premiums, despite the reluctance of The Hague or Berlin.

tax relief

Faced with these shadows, the EU has decided to suspend the fiscal rules for another year, although it has imposed a kind of corset for the spending of the most indebted countries.

Governments have been launching more or less powerful shields to cushion the effects of inflation.

Spain just did it.

Among other measures, it has deployed bonuses for the most vulnerable workers and discounts on transport passes.

However, the States are running out of ammunition at the same time that the international institutions, from the IMF to the Commission, ask to rebuild the fiscal buffers.

In other words: adjustments.

The North, with Berlin at the forefront, is beginning to point in that direction to show the way to prevent risk premiums from skyrocketing.

“It is time to get out of those policies.

Inflation is high and governments should not make it continue to grow through spending, ”says Clemens Fuest, president of the Ifo, who is against keeping the general escape clause activated.

"It's a bad decision," he summarizes.

Forecasts indicate that there are still many risks that cloud growth.

“Households are seeing their income reduced.

Real wage growth has been negative for two consecutive quarters.

And consumer surveys suggest that households expect their real income and consumption to decline even more over the next year”, said the President of the ECB, Christine Lagarde, at the last Sintra forum.

There is a possibility that the clouds will dissipate, which is due to the end of the war in Ukraine.

With the sanctions for the Crimean war still in place, it is difficult for the EU to lift the current retaliation against Russia.

However, it would stop a new escalation.

In the event that hostilities continue and the economic battle between Brussels and Moscow persists,

Jerome Powell, Chairman of the Federal Reserve.

Kevin Dietsch (AFP)


Prices choke the country from full employment


At the Jaleo restaurant on 7th Street, the first that José Andrés opened in Washington, the tables are full day after day.

A large sign on the door promises a $250 bonus to spend at one of the group's locations in Washington to whoever recommends an employee to hire.

Job offers are obvious throughout the city: in the bank office, in the clothing store, in the supermarket, in the cinema... It is estimated that in the United States there are twice as many vacancies as there are unemployed.

The country is close to full employment.

And yet, the economic situation has sunk the popularity of President Joe Biden and threatens to make him lose control of the Senate and the House of Representatives in the November elections.

Blame it on inflation.

Prices have risen 8.6% in the past year, the biggest increase in four decades.

In the Jaleo menu, the Valencian paella costs 65 dollars, 8.3% more than a few months ago.

But the daily reminder to Americans that prices are skyrocketing is fuel.

Gasoline has become more expensive by more than 60% in a year.

On average, it costs about five dollars per gallon (3,785 liters) and there are places where it is around eight dollars.

Furthermore, inflation has entrenched itself and spread to more and more products, from the shopping basket to travel and hotels.

Former Bundesbank President Karl Otto Pöhl used to say that inflation is like toothpaste: once it's out of the tube, it's very difficult to put it back in.

The Fed's Jerome Powell has vowed to stabilize prices, even if it is at the cost of a recession.

What he is looking for is the so-called soft landing, to control inflation without the economy contracting and unemployment skyrocketing.

He does not have it easy, there are those who fear the opposite: stagflation.

In her last Senate appearance, Democratic Senator Elizabeth Warren snapped at her: “You know what's worse than high inflation and low unemployment?

It's high inflation and a recession with millions of people out of work."

Powell himself admits that his wiggle room for a soft landing is slim.

The Federal Reserve, the central bank of the United States, has already made three rate hikes, the last of them the largest since 1994, of 0.75 points, to 1.5%-1.75%.

Another increase will come in July, at the end of the year the rates will be between 3% and 3.5%, and next year close to 4%, according to their own projections.

The withdrawal of liquidity will slow down the economy.

Will that lead to recession?

“It certainly is a possibility.

It is not what we are looking for, but it is a possibility”, was Powell's own response before the Senate.

The chairman of the Federal Reserve admits that there are many factors beyond his control.

Between the May meeting and the June meeting, this sentence disappeared from the Federal Reserve statement: "The committee expects inflation to return to its 2% target and the labor market to remain strong."

Maybe you have to choose only one of the two things.

The International Monetary Fund (IMF) last week lowered its growth forecasts for the United States, from 3.7% to 2.9% this year and from 2.3% to 1.7% for the next.

He expects that in 2024 the growth will be only 0.8%.

In addition, it warns that there are many uncertainties and risks.

Its managing director, Kristalina Georgieva, said in a telematic press conference: "We are aware that the path to avoid a recession is narrowing."

Still, Georgieva believes that such a path exists and that even if the economy eventually falls into recession, it will be a short one.

Experts believe that the fall in wages will weigh on consumption, as will the tightening of monetary policy and the withdrawal of fiscal stimuli.

“The most likely outlook is very weak growth and persistently high inflation.

We see about a 40% chance of a recession next year,” says Ethan S. Harris, global economist at Bank of America Securities.

growing malaise

David Page, head of Macroeconomic Analysis at Axa Investment Managers, speaks in a similar vein: "Although there is a clear risk of recession, it is not our central forecast for the next 12 months," he points out in a report in which he clarifies that this will depend on that there are no scares along the way and that the cycle of Fed rate hikes ends a little earlier than expected, reaching 3.25%.

Recession or not, the economic malaise is already palpable.

A report published in June indicated that 36% of those who earn more than 250,000 dollars a year (four times the median salary) live paycheck to paycheck.

If a significant part of the most privileged 5% lives with inflation with the perception that it will not make ends meet, it is easy to imagine how the rest are and how difficult it is for Joe Biden's party in the November elections.

Queues in London in the latest transport strike.Chris J. Ratcliffe (Bloomberg)


The City sees dark clouds


Boris Johnson has always handled himself well in the single-goal defense.

Brexit was the crowning moment for him.

The problem comes when he must attend to various fronts, and the answers are necessarily contradictory.

After the Bank of England's (BoI) warning last May that the UK economy will enter a slight recession at the end of 2022, the hard wing of the Conservative Party has called on the Prime Minister to cut taxes now;

public sector workers have called strikes throughout the summer to demand a salary increase compatible with galloping inflation (9.1% in June, almost 11% at the end of the year, according to the BdI);

and both Johnson and his finance minister, Rishi Sunak, try to contain electoral pressure from his party,

"What is most worrying is that this inflation has been concentrated in what could be called basic goods," said Andrew Bailey, the governor of the BoI.

“Basically, energy and food.

And when you look at the distribution of the population based on their income, and the consumption of households based on the distribution of those income levels, you find that households with the lowest incomes have the highest consumption of those goods," he added. the.

That is to say, a technically confusing way of indicating that the crisis affects above all the poorest.

That is why what the British Prime Minister has in his hands is a powder keg.

Although the forecasts of the British monetary authority suggest that there could be a modest recovery in early 2023, thus avoiding two consecutive quarters of GDP decline (the technical definition of a recession), the BoI anticipates that the United Kingdom will see reduced its growth next year by 0.25%.

Basically, it will be a simmering recession.

The average prices per household for gas and electricity, which since the decision of former Prime Minister Theresa May in 2019 have an annual cap set twice a year by the regulatory authority (Ofgem), shot up almost 800 euros in April, and they will arrive this October at more than 3,000 euros.

The government decided to give in to pressure in May and approved an extraordinary tax on the “windfall tax” of oil and gas companies.

Much of this tax was intended to finance single payment subsidies to millions of households, between 400 and 1,000 euros, to meet the exorbitant cost of living.

The BdI, like other central banks, has reacted late, but with impetus.

So far this year, interest rates have already risen to 1%.

Focused on fighting inflation, the looming economic storms have not been reason enough for the monetary authority to relax its drastic decision.

"I am aware of the harsh consequences this will have for many people, particularly those with lower incomes and little savings," admitted Bailey after announcing the decision.

Johnson, who won in 2019 with the promise of completing the task of Brexit, but also with that of redistributing wealth in the country, and leveling the impoverished north and the wealthy south, now faces a problem with four fronts: some voters very angry with the scandals of his Government and the galloping rise in prices;

some deputies desperate to keep their seats demanding lower taxes;

an inflation of unexpected dimensions and exhausted public accounts after spending like there was no tomorrow during two years of the pandemic.

“We are going to cut the costs of the Government, we are going to cut the costs of companies, and those of all families,” Johnson promised desperately to the deputies who were going to vote that same night, in early June, a motion of internal censorship to decide the future of the prime minister.

“And, above all, we will dedicate all our energies to reducing the biggest cost for all households: taxes.

They must go down, and they will go down, because it is the only way for the economy to grow again, ”said Johnson.

“There is a very simple chain of events,” Tony Danker, the CEO of the CBI, the UK's largest employers' association, recently explained.

“When business confidence is high, they invest and grow, and recession is avoided.

Anything this government can do to increase that confidence, to show that it takes things seriously, will do something.

But if we are going to have a summer of political fray like the one we saw last week, confidence will be undermined," Danker warned.

He was referring to the railroad workers' strike that had brought parts of the country to a standstill.

The Government was tempted to exacerbate the rivalry with the unions, hoping to win over Conservative voters.


A woman passes a coronavirus control in Beijing on June 28.



The dragon's ailments grow while fighting covid


Chinese Premier Li Keqiang's telematic meeting with officials on May 25 was unusual.

Because of its size: nearly 100,000 local officials participated in the video call.

But, above all, for his frankness.

The difficulties facing the economy of the second world power are more serious than in the worst of the pandemic in 2020, when it contracted for the first time in 30 years, acknowledged the head of government.

A deadly combination of lockdowns in some of the country's main cities -including the closure of Shanghai, its financial heart, throughout April and much of May-, the war in Ukraine and the crisis in the real estate sector left alarming numbers in April and has led most analysts to downgrade their growth prospects for the Asian giant this year.

Few, even within official circles, believe that the government's objective of a GDP increase of around 5.5% for this year will be met.

The World Bank calculates 4.3%.

Other entities, such as the Swiss UBS, reduce their forecast to 3%.

Consumer confidence has suffered a severe blow.

In April, retail sales fell 11.1%;

in May, 6.7%.

Even the consumption of cosmetics has decreased, products that have never stopped seeing their sales grow since China entered the World Trade Organization 20 years ago.

Youth unemployment is at 18.4%, the highest since it began to be calculated officially in 2018 and above the average for the European Union (13.9%) or the United States (7, 8%).

The entry of 10.76 million recent college graduates into the market this summer will skyrocket that figure.

“At the moment, achieving the official growth goal is unattainable,” Andrew Polk, founder of the Trivium consultancy, pointed out in a recent talk.

Iris Pang of ING Economics

The massive confinements, together with the PCR tests, Beijing's great tool in its application of its zero covid policy, are the main responsible for this economic anemia, experts denounce.

"The only predictable thing about China right now is its unpredictability, and that is poison for the business climate," said the vice president of the European Chamber of Commerce in China, Bettina Schoen-Behanzin, at the presentation of her institution's annual report on the confidence of European companies in the Asian country.

60% of the companies included in the report said that doing business in the Asian giant has become more difficult, and 49% cite covid among the three main factors.

Although a contraction in a quarter does not imply a recession.

And Li's talk - or rather harangue - by Li last month was aimed at preventing even that reduction, in a year in which the authorities want stability above all else: the big five-yearly meeting of the Communist Party will be held in the autumn, in in which President Xi Jinping will be appointed for a new term and the rest of the government positions will be renewed, including that of Li Keqiang himself.

The prime minister's call to “stabilize” the situation, according to Polk, has an implicit meaning: that it is imperative to ensure that the April-June stage closes with growth, even if it is minimal.

The investment firm Nomura expects 0.3% for this second quarter.

modest measures

So far, Beijing has introduced relatively modest stimulus measures, including tax breaks for small and medium-sized businesses or increased spending on infrastructure, among other measures.

The most recent data is beginning to show green shoots.

Industrial production for May grew by 0.7%, after a 3% contraction in April.

Investment in fixed assets improved by 6.2% year-on-year.

But, as Nomura analysts recall, although the reopening of cities after confinements "has raised optimism in the short term, we do not see it as a change in trend, given that the covid-zero policy will continue until the beginning of 2023."

Among the risks in the coming months are the possibility of new lockdowns to stem Covid outbreaks, a drastic correction in the weakened housing market or problems related to the hidden debt of local governments, Nomura points out.

But, although below original forecasts, and far from repeating the driving role it played in the 2008 financial crisis, the Chinese economy will continue to grow.

"China is not going to enter a recession," says Alicia García-Herrero, chief economist for Asia at the Natixis investment bank.

Neither "is it going to be a source of global recession, but it will be a source of slowdown, to which it contributes to the extent that it does not grow as much as its potential."

But, Herrero clarifies, although its own inflation is low due to anemic demand and its consumer price index only grew by 2.1% year-on-year in May, "it does export inflation to the rest of the world."

The Beijing government has imposed restrictions on the sale abroad of items such as fertilizers or some steel products, which have triggered their prices outside its borders.

"This is an additional source of tension, given that China exports a third of the world's intermediate goods, since it generates more inflation in countries where it is a serious problem," warns the Natixis economist.

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Source: elparis

All business articles on 2022-07-02

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