Uncertainty is the only constant - Advanced Economies Economic outlook Q2 2022 - TLIM - Triodos ...
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Uncertainty is the
only constant
Advanced Economies
Economic outlook Q2 2022
Joeri de Wilde
TLIMWith the Russian invasion of Ukraine, war has returned to Europe.
A horrendous human tragedy is unfolding before our eyes. Going forward, the
global economy faces a harsh new reality that is dictated by highly uncertain
geopolitical developments. The duration of the conflict and extent of the Wester
sanctions will determine the eventual economic impact. No matter the outcome,
lower-income households in advanced economies will bear the brunt because of
surging food and energy prices. Targeted fiscal support is needed. At the same
time, despite the international tensions, continued global cooperation on
climate change and biodiversity loss is an absolute necessity.Uncertainty is the only constant
A new blow to the global economy Joeri de Wilde
Before the invasion, the global economy was holding up Figure 1 Real GDP growth (Q-o-Q %) Global economy disrupted through four
well. Most advanced economies had returned to their channels
1.4
pre-COVID economic activity levels, and the stage was
set for the final part of the recovery: returning to the 1.2 The war in Ukraine and the related Western sanctions
pre-COVID growth trend. The removal of most social will cause deep recessions in Ukraine and Russia.
1.0
restrictions led to an increase in activity in the services However, combined these economies only account
sector and early signs of gradually easing supply 0.8 for 2 percent of the global GDP, with limited trade
chain disruptions were supportive for manufacturing and financial linkages (apart from commodities) to
0.6
activity. Meanwhile, unemployment rates in the major the rest of the world. For the global economy and
advanced economies had reached pre-pandemic lows 0.4 major advanced economies, the main impact of this
and corporate strength was favourable for investment exogenous shock will therefore be felt through four
0.2
prospects. And, most importantly, the combination of indirect channels:
huge fiscal stimulus and inability to spend during the 0
pandemic had left households with massive excess 1. Rising commodity prices
savings. These savings allowed households to continue -0.2 Russia and Ukraine are key global exporters fora
2021 Q4 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2023 Q1 2023 Q2 2023 Q3 2023 Q4
their normal spending patterns despite the real variety of commodities, such as wheat, corn,natural
disposable income erosion that materialised because De-escalation Ongoing uncertainty (baseline) Escalation gas, oil, palladium, and nickel. The increased
of surging inflation. However, the war in Ukraine will uncertainty has led to a global surge in commodity
Source: NiGEM, Triodos Investment Management
derail the course of the global economy. The favourable prices. Western sanctions have added to this, asthey
starting position will somewhat cushion the conflict- include US and UK embargos on Russian fossil fuel
induced blow, but the economic impact is likely to be In our escalation scenario, the impact would be even The dangerous cocktail of elevated volatility, ongoing imports, and an EU plan to cut two thirds of its
significant even in the most optimistic scenario. higher, with growth being lowered to 2.9% and the monetary policy tightening and prolonged inflation Russian gas imports within a year. The possibility of
global economy falling into a recession. In our de- pressure makes us maintain our cautious asset severe Russian retaliation by cutting key supplies and
In our baseline scenario of ongoing uncertainty, global escalation scenario, which we deem the least likely, allocation stance and remain underweight in equities ‘self-sanctioning’ decisions by many multinational
economic growth for 2022 will be 1.0%-point lower global growth in 2022 would be 3.8%. and neutral in bonds. companies also pushed up prices.
compared to our previous forecast, coming in at 3.4%.
3Advanced Economies Outlook Q2 2022
This upward commodity price shock feeds into the 3. Declining household and business confidence Figure 2 Real GDP growth in 2022 (Y-o-Y %)
already elevated inflation across most major advanced Heightened geopolitical tensions, ongoing uncertainty,
5
economies, tightened financial conditions and conflict-induced
thereby further reducing household purchasing power. additional inflation pressures are all likely to lead to a
This in turn is likely to result in lower consumption. period of reduced household and business confidence. 4
This could increase precautionary household savings
2. Supply chain disruptions and delay business investment.
3
Intentional or accidental physical supply shortages
could have even more economically devastating effects 4. Additional fiscal spending
than commodity price shocks. This could happen if The massive inflow of Ukrainian refugees will force 2
Russia decides to cut its exports of key commodities, European countries to increase their public spending
if Western countries decide on a complete import ban to support these people. The Russian threat will also 1
of certain Russian commodities, or if the war disrupts lead to additional defence spending: Germany has,
production or transportation of commodities from for instance, announced a one-time special budget
0
Russia and Ukraine. The main impact would materialise of EUR 100 billion in 2022 and a structural increase World US Eurozone Japan UK
through energy shortages in countries that are of its long-term budget to more than 2 percent of its
De-escalation Ongoing uncertainty Escalation
dependent on Russian fossil fuels, and through a global GDP. And lastly, Western countries that are now highly
shortage of critical raw materials. Steel, batteries, dependent on Russian fossil fuels will need to allocate Source: NiGEM, Triodos Investment Management
semiconductors, and cars are examples of products additional spending to accelerate the energy transition.
made with Russian commodities. The significant price
increases could also force companies to self-rationing,
thereby lowering production and adding to supply chain
disruptions.
4Advanced Economies Outlook Q2 2022
Ongoing uncertainty most likely, for now De-escalation Ongoing uncertainty (baseline) Escalation
• Diplomatic compromise at latest during • Conflict lingers on for months, with continued • Further escalation of the conflict, with
The extent to which the global economy and major summer, with Russia, Ukraine, the West, and destruction in Ukraine and ongoing uncertainty significant increase in the destruction in
advanced economies are impacted through the China all agreeing on the terms and conditions. about the intentions of Russia. Ukraine and no sight on any diplomatic
channels depends on the duration and magnitude of • Gradual removal of Western sanctions after • Current Western sanctions are left in place solution.
the conflict. Since this is highly uncertain, we present reaching compromise. and additional sanctions are imposed, but no • Strongly divided world as tensions between
three possible scenarios to cover the broad range • Slow normalisation of commodity prices due to complete ban of Russian fossil fuels or other Western countries and Russia-China rise
of options: de-escalation, ongoing uncertainty, and the reduced geopolitical tensions, and no major important commodities. significantly.
escalation. As it stands, we deem ongoing uncertainty supply chain disruptions. • Commodity prices remain elevated well into • More Western sanctions, including complete
the most likely scenario, and further escalation more • Only limited confidence-induced reductions in next year because of continuation of sanctions Russian fossil fuels ban. Russian supply cuts
likely than quick de-escalation. household spending and business investment. and ongoing geopolitical tensions. are just as likely.
• Financial markets would shift their focus to • Supply disruptions because of Western • Significant physical supply disruptions and
other matters, and investment risk premia sanctions and company self-sanctioning, permanently less world trade.
would normalise. lowering supply and hence world trade. • Commodity prices would reach new highs and
• Increase in fiscal spending, as Europe would • Reduced spending and investment, and stay elevated all through the end of 2023.
still want to strengthen its army and all increased savings, as household and business • Significantly lower spending and investment.
Western countries would still want to reduce confidence remain subdued. • Investment risk premia to rise further,
their commodity dependency. • Tight financial conditions and elevated tightening financial conditions even more.
investment risk premia because of ongoing • Significant increase in Western fiscal spending
uncertainty and risk-aversion. on defence and the energy transition to be
• Increase in fiscal spending, especially in substantially increased.
Europe, on defence and the energy transition.
• More divided world compared to de-escalation
scenario, as Chinese backing of Russia would
further increase global tensions and feed into
regionalisation.
5Advanced Economies Outlook Q2 2022
Eurozone main culprit, inflation pushed to will also impact net energy exporters that are further Figure 3 Average inflation in 2022 (Y-o-Y %)
new highs removed from the conflict.
10
In all scenarios, this year’s global economic growth is The conflict will significantly aggravate global inflation 9
significantly impacted by the war. In the de-escalation pressures. Again, in our de-escalation and ongoing 8
scenario, an extended period of heightened risk- uncertainty scenarios, the eurozone will be the main 7
aversion and the already incurred damage before a victim, mostly because of surging European gas
6
diplomatic compromise is reached would mean global prices. Countries that are less dependent on Russian
5
growth equal to 3.8%. This would be 0.6%-point lower supplies, such as the US and Japan, will be less
than our previous forecast. In our ongoing uncertainty affected in these scenarios, but will still experience 4
scenario, the blow to the global economy would be additional upward inflation pressures. In our escalation 3
1.0%-point, with growth being 3.4%. If our escalation scenario, the global surge in commodity prices and 2
scenario would become reality, growth would be 2.9%, considerable supply chain disruptions will also have
1
with the global economy falling into a recession as a severe impact on US inflation. Overall, inflation will
0
there would be two consecutive quarters of negative remain highly elevated across most major advanced US Eurozone Japan UK
growth. economies this year, as the COVID-related inflation
De-escalation Ongoing uncertainty Escalation
pressures have proven to be ‘sticky’. This holds
In each scenario the eurozone is the main culprit especially for the US and UK, where labour markets are Source: NiGEM, Triodos Investment Management
amongst the major advanced economies. This is extremely tight. Japan continues to be the outlier, as
because of its high dependency on Russian gas and low inflation expectations by households seem to be
the relatively strong trade links with Russia and firmly anchored. This makes it practically impossible
Ukraine. In general, net energy importing regions like for Japanese companies to raise prices, as households
the eurozone, the UK and Japan are more negatively would in that case reduce consumption.
affected by the surge in commodity prices than net
exporting countries such as the US. However, the
global surge in inflation, supply chain disruptions and
reduced global confidence resulting in lower demand
6Advanced Economies Outlook Q2 2022
Central banks faced with dilemma Support the most vulnerable, strengthen of the world that does not want to choose between Next to that, close global cooperation remains a
cooperation the West and Russia-China. The West should pursue necessity when it comes to existential threats such
The conflict-related consequences for economic a strategy of diversification of commodity supplies, as climate change or biodiversity loss. These issues
growth and inflation will complicate matters for With respect to advanced economies, the surge in food working closely together with a variety of countries go beyond country borders and can only be effectively
central banks. Before the invasion, most major central and energy prices will disproportionately hit lower- and using a wide range of commodities as inputs. This addressed with global agreements on for instance
banks had started to tighten their monetary policies income households, as they spend a larger proportion would limit dependencies on single countries and CO2 -emission reductions. The West can simple not
in response to surging inflation and tight labour of their total income on these items. Therefore, resources, thereby improving overall resilience. Finding afford to withhold financial support or technological
markets. The war will only exacerbate these inflation besides increased spending on defence and the energy substitutes for resources could also prevent depletion, knowledge, as time is running out. These important
concerns because of additional inflation pressures, transition, governments should implement (more) and improving resilience should go hand in hand with a considerations should not be overlooked when
but economic activity and financial market stability targeted measures that support these vulnerable renewed focus on recycling. the West repositions itself in the rapidly changing
will at the same time be hampered. Since eurozone households. Generalised measures that lower the geopolitical landscape.
growth will be most affected, especially the European price of electricity and gas are less efficient as they
Central Bank could be tempted to normalise monetary equally favour higher-income households, who have
Growth projections
policy slower than markets currently price in. The US more buffers to cope with these price increases. Price
economy will be impacted mostly through additional reductions also do not incentivise a reduction in fossil
inflation, meaning the Federal Reserve is more likely fuel-related energy consumption and are therefore not De-escalation Ongoing uncertainty Escalation
to stick to its recently presented more aggressive in line with carbon emission reduction targets.
GDP growth (%) 2021 2022 2023 2022 2023 2022 2023
tightening plans. However, for now we deem a further
acceleration of tightening in the US (as is priced in by The likelihood of a unified world is at best questionable. Global 5.9 3.8 3.2 3.4 3.0 2.9 2.6
markets) unlikely, as the Fed will increasingly focus on In the current environment, calls on the Western US 5.7 3.1 2.5 2.7 2.2 1.9 1.7
economic growth and financial market stability. democracies to cut ties with autocratic countries such
Eurozone 5.3 3.2 2.2 2.8 2.2 1.6 1.1
as Russia and China are understandable, but also
dangerous. We should recognise that complete self- UK 7.5 4.1 1.7 3.7 1.3 2.9 2.6
sufficiency is an illusion and undesirable: we don’t Japan 1.7 2.1 2.0 1.6 1.8 0.6 0.7
have all the necessary resources available within
China 8.1 5.1 5.5 4.8 5.2 4.0 4.0
the Western part of the world, and by focussing on
self-sufficiency we would leave behind a large part
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