A complex international economic situation

A complex international economic situation

12 September 2022 Off By Oscar Giacomin

After the pandemic-induced crisis, the international macroeconomic context is still characterized by the presence of multiple factors that are slowing down recovery. One factor that is emerging as particularly dramatic is a strong pickup in inflation on a global scale: the global increase in demand after the recession and the lack of commodities (energy and otherwise), added to the supply chain’s problems in meeting demand, caused market prices to increase to unprecedented levels.

This trend was further worsened by the Russia-Ukraine war, with its consequent international sanctions against the Russian Federation. War-related problems contributed to the price increase of raw materials, as both countries are among the biggest producers of agricultural goods (wheat and corn) – mainly exported to Third and Fourth World countries – as well as of precious metals like nickel, aluminum and palladium, that are used in industrial manufacturing in the western world.

The element of greatest concern and uncertainty, however, is energy; this is especially true in Europe, where Russia provides a major share of the oil and gas supplies for both civilian and industrial uses (30% and 40%, respectively). Oil prices have increased, but the increases have been largely contained, thanks to the unused production capacity of some countries (especially OPEC ones) and to the strategic oil reserves of others. The risk of supply shock has therefore been warded off for now, even though global inflation rates are still high.

In such a situation, according to estimates by the International Monetary Fund (IMF) published in the April 2022 World Economic Outlook, changed macroeconomic conditions, pandemic-related developments, and the by now irreversible deterioration of relations between Russia and western countries will lead to a significant deceleration of global GDP in the 2022-2023 forecast period, with GDP estimated at +3.6% for both years and inflation likely to be much higher than expected.

The effects of this deterioration of the geopolitical situation – which will persist in coming years – will be felt primarily in Europe, especially in the central and eastern area, and in those developing countries that are dependent on Russia for food supplies and where vaccination campaigns are still struggling to get off the ground. Therefore, the most significant reduction in estimates pertain to the Eurozone, due to the ongoing war between Russia and Ukraine; the IMF forecasts that the increase in wealth produced in 2022 (+2.8%) will be lower than the overall rate for the group of advanced economies (+3.3%). The war will continue to have evident effects in 2023, when the GDP in the Eurozone will decelerate further (+2.3%), significantly reducing private consumption (+1.6%).

As for the United States, despite a climate of high inflation driven primarily by energy prices, 2022 will see a stronger pace of recovery (+3.7%), because the effects of war in Europe will only affect the country indirectly. In 2023, when the effects of fiscal and monetary stimuli will come to an end, the USA will see a slower rate of GDP growth (+2.3%) and a reduction of inflation (2.9%), close to the Federal Reserve’s target rate of 2%.

For Japan, 2022-2023 estimates point towards a redefinition of the economic activity. The GDP trend will keep growing in 2022 (+2.4%), thanks to the decisive help of private consumption (+2.2%), and the pace of recovery will stabilize in 2023 (+2.3%).

With regards to China, the emergence of more frequent outbreaks and a zero-tolerance approach to Covid forced the Chinese economy to a stop-and-go trend, which escalated into a lockdown for a megalopolis like Shanghai and for its harbor. The IMF forecast points therefore to a slower GDP growth trend in 2022 (+4.4%), which will then accelerate again in 2023 (+5.1%), while still remaining quite below the growth rates experiences in previous years.

All the elements weighing on the global economy also have a massive and negative effect on the outlook for Italy for 2022-2023. The latest forecasts formulated by the European Commission, the IMF, the Prometeia advisory provider, Centro Studi Confindustria (a study group by the Italian employers’ federation), and the Italian Government point to a substantial slowdown of the GDP trend, which will be much lower than the scale of growth indicated in the Government’s policy targets; starting from a general trend of +2.9%, the Government aims to increase the growth rate this year to +3.1%, through an expansionary fiscal stance that makes use of public finance spaces – which amount to 4.5 billion euros, in addition to the 10 billions already allocated previously – and also through containing the rise in public works costs, supporting the economic sectors most affected by war and by the pandemic, and receiving refugees from Ukraine.

In this context, given the forecast of a lower trend net borrowing at 5.1% GDP, the government has decided to confirm the deficit-to-GDP ratio target for 2022 at 5.6 percent and use the resulting margin of about 0.5 percentage points of GDP for these purposes. These measures will generate effects not only on the GDP trend, but also on characteristic public finance trends. Therefore, 2023 will see a further decrease in both deficit and debt-to-national-wealth-produced ratio (3.9% and 145.2%, respectively). As already mentioned, the range of forecasts for 2022 is very wide, but outlooks by the European Commission, the IMF, Prometeia and Centro Studi Confindustria are closer, with a lower growth forecast for 2022 (between +1.9% +2.3%) than the expected growth forecast by the Government. The room for growth will shrink, bringing the 2022 trend to the levels determined by the statistical carry-over effect of the previous year, i.e. 2021, in a high inflation context. Inflation growth will cut spending capacity, weakening consumption on one hand, and shrinking revenue margins for companies on the other hand; this will be especially true for companies operating in industries with energy-intensive production cycles, but rising costs and deteriorating expectations on domestic and foreign demand will weigh on all companies. For 2023, there is still a wide difference in outlook between forecasts by the Government, the European Commission, and Prometeia on the one hand, and those by Centro Studi Confindustria and IMF on the other hand; more specifically, the first believe that that growth can be around 2.5 points, whereas Confindustria is more pessimistic and in line with forecasts by the IMF, which puts Italian growth for 2023 at just over 1.5 points, thus close to Italy’s potential GDP.


Oscar Giacomin  / General Manager, Facto Edizioni

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