CONFRONTING THE STORM

The number of hits to the global economy in the last three years is breaking records. Analysts talk about an impending or even imminent global restructuring and nullification, while international financial institutions gloomily promise that things will get even worse due to a massive energy crisis in Europe, food shortage, rising prices, depreciating currencies. Even one of these factors is enough to shake the most stable economic system.

Pessimistic forecasts

The Organisation for Economic Cooperation and Development (OECD) has worsened its global GDP growth forecast for 2023 to 2.2% from 2.8% expected in June. The organisation's economists believe that the war between Russia and Ukraine will cost the global economy $2.8bn in lost GDP by the end of next year. The consequences can be even more significant if Europe has to ration energy consumption in the winter season.

Fitch Ratings lowered its forecast for global economic growth in 2022 to 2.4% from the 2.9% expected in June and for global GDP in 2023 to 1.7% from 2.7%.

"The European gas crisis, high inflation and the accelerated pace of monetary tightening worldwide have serious implications for the economic outlook," says the updated Global Economic Outlook (GEO).

Earlier, the International Monetary Fund (IMF) has earlier lowered its forecast for global GDP growth to 3.2% in 2022 due to policy tightening by the Federal Reserve System (Fed) and the European Central Bank (ECB) as well as lockdowns and problems in China's construction sector.

The research and analysis agency Economist Intelligence Unit (EIU) expects the global economy to grow by 2.8% in 2022 (previously 3.9%). "The war in Ukraine has put pressure on global commodity prices, exacerbated supply chain disruptions, and contributed to soaring inflation in much of the world. China's coronavirus policy puts additional pressure on the international economy," the report said. As noted by the agency, the war has reduced the global GDP forecast by $1 trillion.

Europe under gas pressure

The main focus of international experts is on very negative trends in Europe and the US. They believe that the eurozone and UK economies will be in recession as early as this year, while the US will face a mild recession in mid-2023 (Fitch).

The eurozone economy will only grow by 0.3% in 2023, German GDP will fall by 0.7%, says the OECD. June forecasts assumed an increase in Eurozone GDP next year by 1.6%, Germany by 1.7%. Fitch Ratings believe that GDP of Eurozone will decrease by 0,1% in 2023 because of the consequences of gas crisis (in June they expected the GDP increase by 2,1%). This conclusion sounds reasonable given the massive energy crisis that threatens Europe after the abandonment of Russian gas. Ultimately, it is bound to hit the industrial sector and production in the continent.

However, ECB Vice President Luis de Guindos also acknowledged that economic growth in the EU will slow down significantly in Q3 and Q4, "with the possibility that we could see the growth rate approaching zero".

By the way, the ECB raised interest rates by an unprecedented 75 basis points in September and promised further measures in the coming months as inflation in the Eurozone has reached its highest level in almost 50 years and is set to rise even higher to 9.6%.

Top two also under attack

The world's biggest economy, the US, is also under attack. Growth of the US economy in 2022 was worsened by Fitch to 1.7% from 2.9%, for 2023 to 0.5% from 1.5% and by the OECD to 0.5% from the expected 1.2% in June with the remarks that more severe drop is possible if inflation does not slow down in line with Fed expectations.

Incidentally, the Fed has also significantly lowered the estimated US GDP growth in 2022 and raised its forecasts for the country's consumer price rise from 2022 to 2024.

The US economy is now expected to grow by only 0.2% this year compared with the 1.7% announced in June, according to the Fed's announcement. GDP growth forecasts for 2023 and 2024 have also been worsened to 1.2% and 1.7% from 1.7% and 1.9%, respectively.

In September, the Fed expectedly raised the federal funds rate by 75 basis points, now at 3-3.25% p.a. and at its highest level since the 2008 financial crisis. Thus, according to Fed, the annual rate will reach 4.4% by the end of 2022. The US economists explained their decision by the fact that the events in Ukraine create "additional upward pressure on inflation and have a negative impact on global economic activity".

Recently, central banks of eleven G20 countries held monetary policy meetings. Four countries left their rates unchanged (People's Bank of China, banks of Japan, Indonesia and Turkey), six countries raised them (Fed, ECB, banks in Canada, South Korea and reserve banks in Australia and South Africa) and only the Bank of Russia reduced its key rate by 150 points - to 8%. By the way, despite the continued stability of the base rate, the outlook for the Chinese economy is also far from optimistic. According to the World Bank (WB), the growth of the Chinese economy in 2022 and 2023 will be reduced due to the crisis on the real estate market and the strict policy of the Chinese authorities to contain the spread of COVID-19. According to a new forecast by the WB, Chinese GDP will increase by 2.8% this year and by 4.5% next year, whereas in June it was expected to rise by 4.3% and 5.2%, respectively.

"The recovery of the Chinese economy is constrained by lockdown restrictions and a downturn in the real estate market, whereby we expect China's GDP to expand by 2.8% in 2022 and grow by 4.5% next year," Fitch review reports. The Chinese economy was announced to grow by 3.7% and 5.3% respectively in July. "The success of the Chinese authorities in containing the spread of the coronavirus comes at the cost of serious economic consequences," said the WB review.

Thus, the international economic situation does not promise anything good for the near future. Economists do not have a clear idea on how to overcome the crisis, as the situation is largely dependent on a very precarious geopolitical environment. On the other hand, no matter how strong the external pressure, analysts point out that the right domestic policies can save small economies and keep them afloat in this powerful storm. And such countries will find it much easier to fit into the new economic reality once the crisis is over.