Accumulating Economic Pressure as Crises Intensify Midway Through the Year
In the global economic landscape, several significant developments are shaping the future.
The European Central Bank (ECB) and the Federal Reserve System in the US are expected to take aggressive measures to combat inflation. The ECB is planning to lift rates by 75 basis points this year, while the Fed is set to raise rates by another 75 basis points this July. These moves aim to curb rising prices, particularly those driven by energy costs and geopolitical tensions.
However, these tightening measures come at a time when economies are facing challenges. Europe, for instance, is experiencing economic instability due to inflation and supply chain issues, resulting in negative private consumption in H1 2022. The ongoing move away from Russian oil supply will impact the energy landscape, with Europe losing around 2.6 million barrels per day from its energy mix. To cope, Europe will rely on coal as a substitute for gas in the short term due to the RePower EU plan's mandatory acceleration of renewables production.
China's economy, which grew by 8% in 2021, is experiencing a sharp deceleration due to strict Covid policies and lower private consumption. Lingering Covid measures rule out a V-shaped recovery in China, and growth for 2022 is expected to be below expectations. Export price inflation is a concern in China, with producer prices remaining elevated above 6%.
In the US, inflation is currently at the highest level in 40 years, and unemployment is forecasted to reach 5% by early next year. A recession looks more likely than not for the US.
On the bright side, the transition to clean energy is presenting new opportunities. Demand for recycled materials is expected to grow due to their lower carbon footprint. Green hydrogen is being explored as a potential solution to current supply limitations, although production costs are still high.
The demand for electric vehicles (EVs) is increasing, but the industry faces challenges due to a lack of output in copper, a key component in EV batteries. Underinvestment in the mining sector has led to a shortage, making it 3.5 times more expensive to produce copper for EVs compared to traditional vehicles.
The global financial market is also feeling the impact of these economic shifts. The total return on credit was down 14% year-to-date, and we expect a widening of spread by the end of the year - by about 20 basis points for investment grade and 50-60 basis points for high yield. More than 150 downgrades in Europe occurred in the first quarter of 2022, with default rates close to 2% for Europe and around 1.5% in the US.
In the emerging market debt sector, local debt will decline by just 8%, while the trend for bitcoin remains negative and is expected to further decrease in the short term.
Some countries, such as Germany, are implementing measures to manage these challenges. Temporary inflation in the second half of 2022, mainly due to rising energy prices amid the energy transition, is expected in Germany. To control this, Germany plans to implement a comprehensive cap-and-trade system covering all sectors to limit greenhouse gas emissions and manage energy costs more effectively.
In conclusion, the global economy is navigating a complex web of challenges, from inflation and energy crises to the transition to clean energy. However, with strategic planning and innovative solutions, it is possible to weather these storms and emerge stronger.
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