Key Takeaways
- Since our most recent growth forecast at the end of March, a number of macro variables have deteriorated, including weaker first-quarter numbers in many countries, higher energy and commodity prices, a longer-than-expected Russia-Ukraine conflict, faster monetary policy normalization, and slower Chinese growth.
- This has led us to mark down our GDP forecasts. We now expect U.S. growth to decline by 80 basis points to 2.4%, eurozone growth to drop by 60 basis points to 2.7%, and China’s growth to fall by 70 basis points to 4.2%. Changes to 2023-2025 are relatively minor.
- The balance of risks to our baseline has deteriorated since our last forecast and remains firmly on the downside.
The global economy continues to face an unusually large number of negative shocks. At the beginning of 2022, the effects of the COVID-19 pandemic were in retreat in most geographies. As a result, we forecast a robust but uneven rebound, with above-trend growth in most countries and moderately high but transitory inflation. The main questions were when economies would regain their pre-COVID-19 path of output, and what changes brought about by the pandemic would be
structural.
Two developments have altered the macro picture. One is Russia’s invasion of Ukraine in late February. This sent energy and commodities prices (even) higher for (even) longer and put a dent in confidence, which was at high levels. The second is inflation, which has turned out to be higher, broader based, and more persistent than thought just a few quarters ago. We lowered our growth outlook in a March 8 update and largely reaffirmed this in our second-quarter Credit Conditions reports that came out later that month.
Factors Driving Our Forecast Update
More recently, macro conditions have continued to weaken, and we have again elected to provide an interim macro update between our scheduled Credit Conditions rounds, based on the following five factors.
Data revisions for the first-quarter national accounts will have mainly base effects on our forecast. Many economies came in lower than expected in the quarter, although a deeper dive is important to determine why. In the U.S., the drivers of the 1.4% decline in GDP (seasonally adjusted and annualized, or SAAR) were a steep drawdown in inventories and a sharp rise in imports. These both suggest strong underlying demand, which was evident in the solid personal consumption outturn. This significant savings cushion in the U.S. also helps explain why households are still willing to absorb higher prices at checkout stands. That key variable rose 2.7% SAAR in the quarter and contributed over 1.8 percentage points to growth. Both of these measures were stronger than the third and fourth quarters of 2021.
Consumer spending is also expected to have been resilient in Europe, despite rising prices, owing to dissaving and pent-up demand. Eurozone GDP increased by 0.8% in the first quarter. Higher energy and commodity prices will destroy purchasing power for both firms and households. Moreover, the effects will be immediate, although they could be ameliorated by running down savings. This is particularly relevant in the U.S. and Europe, where households built up savings during the worst of COVID-19 through government transfers and by having limited spending options due to the lockdowns. Higher energy and commodity prices will benefit producers, with the U.S. now the largest energy producer in the world. But these positive effects are typically outweighed by the hit to consumers.
The Russia-Ukraine conflict looks likely to last longer than we expected, which will continue to dent confidence and reroute energy flows. There is a large degree of uncertainty around how the conflict might develop, but so far it has not spread beyond the two countries, and the direct economic impact outside of higher energy and commodity prices has been limited. Consumer and producer confidence has taken a hit–most notably in Europe–but this is from high levels, and most indicators remain relatively strong. That said, we expect a continued deterioration in confidence as the conflict drags on. Rerouting energy flows is an ongoing structural consequence of the conflict.
S&P Global Ratings acknowledges a high degree of uncertainty about the extent, outcome, and consequences of the military conflict between Russia and Ukraine. Irrespective of the duration of military hostilities, sanctions and related political risks are likely to remain in place for some time. Potential effects could include dislocated commodities markets — notably for oil and gas–supply chain disruptions, inflationary pressures, weaker growth, and capital market volatility. As the situation evolves, we will update our assumptions and estimates accordingly. Faster monetary policy normalization will slow demand more than previously expected. With only a few exceptions, many in Asia-Pacific, central banks are raising–or are expected to raise–rates sooner and faster than we forecast in our previous round. These actions will work through wealth effects as asset prices (financial and nonfinancial) moderate or decline, and through the spending channel as the cost of borrowing rises. However, the transmission operates with lags that are long (several quarters) and variable. We therefore expect a peak impact in 2023.
Slower Chinese growth will have a modest impact on other economies because of the skew toward consumption. We are revising 2022 GDP growth to 4.2% from 4.9%–most of the reduction reflecting slower consumption growth due to the ongoing effects of the lockdowns. While China is the world’s second-largest economy and the biggest contributor to global GDP growth, the degree of spillovers to the rest of the world depends on the composition of the change in growth. Investment links to the rest of the world via supply chains, commodities, and capital goods are stronger than consumption links. This suggests that our slower China growth forecast will have relatively muted effects on trading partners.
