A recession to avoid stagflation? The world economy at a crossroads Coface Barometer Q2 2022
Four months after the start of hostilities in Ukraine, first lessons can be drawn: the conflict, which is set to last, has already upset the global geo-economic balance. In the short term, the war is exacerbating tensions in a production system that has already been damaged by two years of pandemic and is heightening the risk of a hard landing for the world economy: while the latter seemed to be facing the threat of stagflation a few weeks ago, the change in tone of the central banks, faced with the acceleration of inflation, has resurrected the prospect of a recession, particularly in the advanced economies.
In this complex environment, Coface revised downwards the evaluation of 19 countries, including 16 in Europe – Germany, Spain, France and the United Kingdom in particular – and made only 2 revisions upwards (Brazil and Angola). At the sectoral level, the number of downward revisions (76 in total, as opposed to 9 upward revisions) highlights the spread of these successive shocks across all sectors, both energyintensive ones (petrochemicals, metallurgy, paper, etc.) and those that are more directly linked to the credit cycle (construction).
As the horizon continues to darken, the risks are naturally bearish and no scenario can be ruled out.
The slowdown in activity and the risk of stagflation are becoming clearer Q1 growth figures were below expectations in most developed economies. In addition, GDP in the eurozone grew only very weakly for the 2nd consecutive quarter, with even a decline of -0.2% in France. This was due to a drop in household consumption against a backdrop of declining purchasing power. Activity also declined in the United States, hampered by foreign trade and the difficulties experienced by the manufacturing sector in replenishing its inventories. These figures are all the more worrying as the economic consequences of
the war in Ukraine were just starting to bite.
Considering the acceleration in inflation, the deterioration in agents’ expectations, and the tightening of global financial conditions, activity in Q2 does not look much better in the advanced economies, and considerably less favourable in the emerging economies. While it is probably too early to say that the global economy has entered a stagflationary regime, the signals are consistent with this view.
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