Author: MAPFRE Economics
Summary of the report’s conclusions:
2022 Economic and industry outlook: second quarter perspectives
Madrid, Fundación MAPFRE, May 2022
The path to global economic recovery marked the beginning of the year 2022, with positive, albeit moderate, growth rates. This recovery was conditioned by factors such as the new Omicron variant, which, due to experience gained in previous pandemic waves and effective vaccines and treatments, enabled COVID-19 to be treated as a more endemic, normalized disease in this new phase. It was also influenced by high and persistent inflation rates, which were starting to erode real incomes; and supply chains that, while continuing to exacerbate the imbalance between supply and demand, showed some improvement and freeing up in certain areas of manufacturing and transport.
However, due to the invasion of Ukraine by Russia during the first quarter of the year, growth forecasts began to show significant deterioration at a global level. The rise in commodity prices worldwide has intensified, mainly in the sphere of energy, oil derivatives and food, raising the risk of economic disruption, albeit with certain regional differences. This will imply greater risks for production capacity and growth while increasing the inflation risk.
This shock has come at a time when economic policies were already beginning to pivot from the broadly accommodative environment that became widespread during the pandemic crisis, towards a more tightening approach, still in its initial stage in developed markets and at a much more advanced stage in most emerging markets. Similarly, although lagging somewhat behind the commodity and energy price channel, a deterioration is foreseeable that will begin to affect corporate margins and, secondly, to be passed on to the end consumer in a further attempt at cost pass-through, resulting in a second round of higher prices, less intense base effects and higher and longer-lasting inflation expectations. Given such dynamics, and given the risk of leading to a possible destruction of demand, economic policymakers are in a tricky position to respond. On the one hand, there is a need to recover fiscal and monetary margins, as well as to combat historically high inflation rates through more orthodox policies; and on the other hand, there is a need to delay the process and resume fiscal dampening in view of the current scenario of deteriorating activity and implications for prices. So much so that a pause in normalization or additional fiscal expansions could feed back into the problem, as was the case with the initial bottlenecks whose ignition relied on fiscally and monetarily stimulated demand.
At the current turning point, the dynamics of global economic activity is affected by this new geopolitical condition that implies the possibility of unknown actions, rapid escalation, difficult solution and with the potential to lead to systemic risk events, deteriorating the forecasting scenario through other channels. However, and in line with what we have stated in previous reports, the base scenario has the broad base of probabilities and the stressed (alternative) scenario presents a stress approach resulting from it, where the impact on activity in this scenario would become more unfavorable and with latent stagflationary implications, mainly for Europe.
In the full analysis of the report prepared by MAPFRE Economics 2022 Economic and industry outlook: second quarter perspectives, which can be found at the following link, a third scenario appears, leveraged on the possibility of a broader conflict based on dynamics that, despite being within the tail risks, would have the potential to lead to a global recession in 2023 (shock scenario).