Macro Insights Weekly: Slowdown everywhere

From energy and food price spike to China’s Covid struggles, and from concerns over the war in Ukraine to US Fed rate hikes, the global economy has a tough 2022 in progress.
Group Research, Taimur Baig, Radhika Rao17 May 2022
  • A mix of high inflation and rising interest rates is likely to dampen US demand
  • The war in Ukraine is casting a dark and long shadow on Europe
  • China‚Äôs struggles with the pandemic look unlikely to abate soon
  • In Asia, economic re-opening, resumption of tourism, and still-strong exports demand are pluses
  • But high inflation and rates/FX/flows volatility are creating challenges
Photo credit: Unsplash Photo

Commentary: Slowdown everywhere

Macro shocks are numerous these days; from energy and food price spike to China’s Covid struggles, and from concerns over the war in Ukraine to US Fed rate hikes, the global economy has a tough 2022 in progress.

In the US, with the US Fed signalling sustained rate hikes, an economic slowdown is looming. Higher interest rates would hurt demand for autos and homes and refinancing, and they would also raise the cost of capital for fixed asset investment. Retails sales and housing data are strong presently, but we’re afraid that there is only downside from here onward. On fixed capital formation, Atlanta Fed’s Nowcast is already picking up a decline in domestic investment. We expect inflation to peak this quarter, but the level of prices will remain uncomfortably high through the course of this year, leading to a weakening of household and business sentiments. Our current forecast of 3% growth for the year has mounting downsides, unfortunately. In the absence of any visible positive catalysts, the risk around our forecast is asymmetrically weighed to the downside.

Meanwhile, in the Eurozone, fallout from the war in Ukraine and possible disruption in energy supply loom large. We note that there are offsets in the making, from a rise in public expenditure (on defence) and securing alternative sources of oil and gas (from the US and Qatar), but the outlook is grim, nonetheless. A prolonged period of security risks and sustained high inflation look likely, casting a heavy shadow on private consumption and investment. Our Euro area GDP growth forecasts of 2.2% likely has even greater downside risks than the US forecast.

Back here in Asia, China’s outlook, with its pandemic struggles, darkens by the day. Short of breakthrough with vaccines and anti-virals, we see few alternatives to the restrictions on movement currently in place. It is clear that the authorities see the public health risk way too great, given the relatively low levels of effective vaccinations, to just live with the virus. Hence the lockdowns will continue, dragging down employment and production. Our Nowcast model is tracking 3.9% real GDP growth in Q2, but the risk is that it could be much lower (perhaps down to 2%) if the lockdowns persist through June.

Our GDP Nowcasting models are presently tracking India at 3.3%, Indonesia at 4.8%, and Singapore at 4.3%. Economic re-opening, resumption of tourism, and still resilient export demand underpin our somewhat constructive prognosis. But inflation is clear and present in most places, and a slowdown in the West will readily translate into a weakening of exports demand. Add to this ongoing capital flow and currency market volatility, Asia has difficulties galore as well.

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Taimur Baig, Ph.D.

Chief Economist - Global


Radhika Rao

Senior Economist – Eurozone, India, Indonesia

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