Stagflation is the main downside risk to the global economy

The global economy is expected to experience a sharp slowdown in 2022, while the risk of stagflation – a period of economic stagnation and high inflation – looms larger amid high and volatile commodity prices, significant geopolitical tensions and uncertainties. slower growth in China. While the US and Eurozone economies face high stagflation risks, developing and emerging markets could be hit hard if the global economy enters an era of stagflation. Euromonitor International’s new global stagflation macroeconomic scenario outlines the possible consequences of global stagflation on major economies.

Growing uncertainty, rising energy prices and deteriorating supply conditions could trigger global stagflation

Euromonitor International’s Global Stagflation Scenario is based on the assumption that worse than expected global negative fallout from the war in Ukraine through uncertainty, confidence and supply constraints leads to stagnant global economic growth combined to high inflation. If cuts in Russian energy exports to advanced economies are deeper and steeper, and an energy decoupling from Russia is more difficult than expected, supply constraints will worsen, leading to larger increases in energy prices. energy. An intensification of war and geopolitical conflict would also lead to a significant decline in global private sector confidence and a substantial increase in financial risk premia relative to the baseline forecast.

In the global stagflation scenario, global real GDP growth would be 0.5-2.0 percentage points lower than the baseline forecast and fall to 0.7-2.5% in 2022, followed by an inclusive figure between -1.3% and 1.0% in 2023. Global inflation would increase to 7.2-9.4% in 2022 and 5.7-8.3% in 2023. Given its impact on growth of global real GDP, global stagflation is now identified as the main downside risk to the global economy, followed by a resurgence of the COVID-19 pandemic. This scenario is assigned a probability of 22 to 32% over a one-year horizon.

Source: Euromonitor International Macroeconomic Model
Note: (1) 2022 data is forecast; forecast updated June 16, 2022 (2) Regional real GDP growth using PPP weights

The euro zone and the United States threatened by the risk of stagflation

The euro area is very vulnerable to the negative fallout from the war in Ukraine, due to its high dependence on Russian energy imports, its relatively high exposure to exports to Russia and the greater uncertainty related to risks. escalation of the war into a wider European conflict. In 2021, Russia supplied around 40% of Europe’s oil and gas, according to the International Energy Agency. A more abrupt cut in Russian energy supplies would force energy rationing in the EU, leading to higher energy price hikes and significantly undermining economic activity. In the global stagflation scenario, significantly higher financial risk premia and lower private sector confidence relative to the baseline scenario would reduce euro area real GDP growth to 1.5% in 2022 (1, 0 percentage points lower than the baseline forecast), followed by an economic contraction of around 0.9%. % in 2023.

imagemz0ee.pngSource: Euromonitor International Macroeconomic Model
Note: (1) 2022 data is forecast; forecast updated June 16, 2022 (2) Regional real GDP growth using PPP weights

For the United States, the risk of stagflation has also increased considerably. Although the U.S. economy continues to be supported by a strong labor market and a strong oil and gas sector, ongoing supply constraints and the negative fallout from the war in Ukraine continue to drive up food prices and energy, undermining the confidence of the private sector. US consumer price inflation growth moderated slightly in April, but rose again in May 2022 to 8.6%, the highest level in 40 years. Along with falling pent-up demand, consumer confidence is declining (the US consumer confidence index in May 2022 was lower than at the start of the COVID-19 pandemic). Given that the US Federal Reserve recently accelerated interest rate hikes, borrowing costs are expected to rise, which will further limit consumer spending and business investment.

If uncertainty about the global economic and geopolitical outlook increases and global energy and food supply cuts worsen due to more severe supply chain issues, inflation in the United States could rise further. accelerating in 2022-23 and the economy could experience a contraction in 2023. stagflation scenario, forecasts for US real GDP growth could be 1.0 and 2.4 percentage points lower than the baseline forecast for 2022 and 2023 respectively.

U.S. Key Economic Indicator Forecasts: Baseline and Global Stagflation Scenario

image7gra.pngSource: Euromonitor International Macroeconomic Model
Note: 2022 data is forecast

Global stagflation would hit emerging and developing markets hard

Global stagflation could seriously affect the growth prospects of emerging and developing countries that depend on external supply and demand. A sharp slowdown or recession in the United States and the Eurozone would lead to lower demand for China’s exports, which would undermine the country’s economic activities and growth. For commodity exporters like Brazil and Argentina, the impact of weaker global demand and high inflation would more than offset any short-term gains from higher energy prices. and raw materials. Tighter global financial conditions could have potentially adverse consequences for highly indebted developing and emerging markets in Latin America and Africa. Under the global stagflation scenario, real GDP growth in emerging and developing markets is projected to fall to 1.9% in 2022 and 0.3% in 2023, from 3.1% and 4.0% respectively in the forecast. reference.

With increasing economic uncertainty, examining alternative economic scenarios would help companies examine the risks and vulnerabilities of economies to support critical decision making. For more analysis on the global economic outlook and the risks of stagflation, read our full report, Global Economic Forecast: Q2 2022.


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