The world’s economic outlook turns grim
Between inflation, war, gas and Covid — and the specter of more problems on the horizon — it’s hard to be optimistic for the rest of 2022
Just when we thought we were out of the worst of the pandemic's main economic challenges, stuff got weirder. Now, thanks to a combination of Vladimir Putin's war in Ukraine, rising inflation and more Covid-19 cases, countries have their own unique cocktails of challenges and weak spots to contend with.
Let's take a spin around the world in a few charts.
US's Surprise GDP Contraction
The US's big economic red alert this week was the surprise GDP contraction. The US economy shrank for the first time since 2020, falling 1.4% in the first quarter of this year.
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Surprise Shrinkage
The US economy contracted for the first time since the pandemic began
Why did it shrink? John Authers has a couple of possible explanations. First is that the numbers are wrong. Second, and potentially more likely, it's clear that the decline was driven by the trade balance — a jump in imports and a drop in exports.
GDP Drivers
The main driver behind Q1's GDP contraction was the trade balance
Gary Shilling says that it raises the risk of recession this year. Companies built up their inventories in late 2021 to avoid supply-chain issues, but consumers held back. Now the piles of goods will only increase — with about 60 ships waiting to unload in California, triple the norm — and take many months and discounting to shrink.
On the more optimistic end of the outlook, John thinks there are silver linings. Inflation isn't as terrible as we all thought. The core personal consumption expenditure index came in at an annualized rate of about 5% — that's still too high to relax, but not as bad as we feared.
It may not have been a surprise for some. Brooke Sutherland writes that General Electric and 3M used the words "uncertain" and "uncertainty" liberally during their earnings calls last week. While some sectors, such as aviation and the oil and gas sector in the US, might still stand to have a good year, it's hard to hear the optimism over the macroeconomic noise.
Stagflation Comes for the UK
Across the Atlantic, the UK is facing a coalition of awfulness. It's got a super-hot labor market, like the US does, and runaway energy prices, like Europe. The result? High inflation and stagnant growth. Delightful.
Stagflation Nation
The IMF projections for 2023 predict that the UK will have the highest inflation out of the G7 nations, and the lowest growth
Source: International Monetary Fund
That's not all. The beleaguered UK has a third issue to deal with: a Treasury intent on fiscal tightening. Marcus Ashworth explains that while the Bank of England is ahead of both the Federal Reserve and European Central Bank in lifting interest rates, it is rapidly running out of hiking road before it risks tipping the economy into recession. The British consumer is struggling and will struggle more as taxes and energy prices rise this month.
Germany has a gas problem
The source of Germany's problems lies to the east — in Russia. This week, Putin halted flows of gas into Poland and Bulgaria. Very soon, Germany is going to face a dilemma: Either pay for gas on Putin's terms, or go cold turkey. A recession would be brutal. Javier Blas says that, back in 2018, Germany war-gamed a massive natural gas shortage. The results read like an apocalyptic vision: hospitals and jails forced to close, livestock left to die, rationing imposed, and the disappearance of hundreds of thousands of jobs.
Here's why losing Russian gas would be such a tremendous issue for Germany: A quarter of the country's energy comes from imported natural gas — two-thirds of which was supplied by Russia in 2020. At the end of the first quarter, Germany had cut down Russian imports to just 40% of its natural gas mix, and is aiming to reduce it further by the end of the year (if Putin doesn't get there first!). But that still means that if Russia switched off the gas valve, Germany would need to find a source to replace about 10% of its total energy mix.
Gas Dependency
Germany got two-thirds of its natural gas from Russia in 2020*
And here's why it'd be a huge deal for everyone else: Chris Bryant wrote at the start of April that if Russian gas imports are halted now, Germany would likely face shortages by the winter. Households and social services that rely on gas for heating have priority, which means parts of German industry might have to curtail production or shut down. Germany produces parts and chemicals that are vital to other supply chains, so any stoppages would rip through Germany's manufacturing base and the rest of Europe.
Who'd want to be Olaf Scholz right now?
China's Colossal Covid Wave
China is in trouble, and when China is in trouble, global growth is, too.
John writes that severe Covid lockdowns in Shanghai (where residents are running out of food and growing angrier by the day) and a rapidly depreciating currency cannot be ignored. China's current wave is its worst yet, and if the government really presses on with Zero Covid, the logic of its policy requires preparing to inflict a serious slowdown on Chinese growth. More than 340 million people in regions that contribute to about 35% of China's GDP are limited by some form of Covid-related lockdowns.
Covid in China
The current wave of Covid-19 in China is the worst yet by a dramatic margin
Source: Our World in Data
Meanwhile, President Xi Jinping is just determined to get one over on the US this year, whatever it takes. That means ensuring China's GDP growth outpaces the US's this year. At what cost?
Shuli Ren explains that, when China calculates its quarterly GDP numbers, it uses the so-called production account, which prioritizes the value-add of each industry and brushes aside end demand. That means local officials can worry less about what households spend and instead incentivize factories to make machinery tools, for example, which state-owned entities can procure as fixed-asset investments. If beating the US is what Xi most cares about, what does it say about his policy priorities? With rising job uncertainty and global inflation coming to bite, people in China are bound to feel their living standards are slipping.
It might be a risky move. Adam Minter writes that the accumulation of misery in Shanghai is rapidly undermining faith in a government that's spent decades improving Chinese living standards. Inflation will only aggravate citizens more.
More than just an economic issue, inflation is linked to political instability, says Stephen Mihm. In one study, inflation's effects were found to vary greatly, depending on the quality of a country's institutions. Post-World War II, for example, high-functioning democracies weathered inflationary storms far better than poorer, authoritarian countries.
Still, with economies around the world facing some serious crux points, caution would be wise for all.
Lara Williams manages Bloomberg Opinion's social media channels. @lararhiannonw
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.
