The global economy moves away from stagflation
The latest Economic Outlook released by Crédito y Caución shows an improvement in global forecasts that make stagflation of the global economy less likely. The credit insurer expects global growth in 2023 to reach 2.2%, still weak, but one percentage point higher than expected six months ago. Several factors have driven this evolution of its forecasts. The most relevant is China's shift from zero tolerance to reopening, boosting its growth and that of the rest of the world by eliminating supply chain disruptions. In addition, both Europe and the United States have proven to be more resilient than expected to stagflationary pressures. In Europe, business flexibility has cushioned adjustments to the impact of energy prices and trade sanctions linked to the war in Ukraine. In the US, the labour market has kept unemployment below 4%, underpinning the strength of consumption.
However, the report notes that the prevalence of high inflation, especially core inflation, and tight monetary policy keep the outlook for 2023 and 2024 under pressure. Although Crédito y Caución expects headline inflation to return to normal well into 2024, aggressive rate hikes in 2022 and 2023 bring us close to the end of monetary tightening.
Against this background, business sentiment indicators for the services sector are improving strongly in all regions of the world. Industrial sector business sentiment indicators are less positive, especially in the euro area. Several factors explain this difference. First, the post-pandemic recovery has been led by the recovery of services such as tourism and hotels and restaurants at the expense of goods. Secondly, rising energy and financial costs weigh more heavily on manufacturing firms, which are more energy and capital intensive.
One of the most important determinants of future growth will be the end of the war in Ukraine, which is still very uncertain. Tensions between Russia and the European Union, the United States and the United Kingdom are expected to continue beyond a possible ceasefire, sustaining upward pressure on commodity and food prices. As for the pandemic, the World Health Organisation has formally declared that it is over, removing supply chain tensions and inflationary pressure on transport. Past restrictions and unprecedented fiscal stimulus are estimated to have generated excess savings in the range of 5.1% to 9.2% of GDP for the eurozone, US, UK and Japan by the end of 2022. So far, the US consumer has been the most likely to spend them. On the other hand, over the coming months we will move towards gradual fiscal consolidation to reduce large public deficits, although it is not out of the question that especially advanced economies will continue to use fiscal policy to mitigate the impact of economic shocks.
The risk of de-globalisation and even regional fragmentation has clearly increased. China is not distancing itself from Russia's stance on Ukraine, which has reinforced the tension in its relationship with the United States. This puts pressure on supply chains and will gradually increase the cost of trade. However, the baseline scenario does not envisage a decoupling of the major economic powers or an improvement in their current relationship. Tariff and non-tariff barriers that have been lifted in recent years will remain in place.