Strength ahead, despite crisis

The crisis in Europe has been a shock to perceptions of global stability. But it is not, in ANZ Research’s view, a shock at this stage sufficient to derail the global economy.

Global growth is likely to remain strong, with Europe the only major economy meaningfully impacted, and already elevated inflation given an additional boost. As such, the risks around the cycle have risen, and engineering a soft landing has become more difficult for policymakers.

There are a few reasons ANZ Research expects the global economy to retain strong momentum despite the crisis in Europe. Directly, Russia and Ukraine account for only 2 per cent of global gross domestic product (GDP). Policy remains very stimulatory on a global level, with settings in many jurisdictions not far from pandemic-era extremes.

Many economies are dealing with excess consumer demand, as evidenced by supply chains struggling to provide sufficient supply, suggesting some reduction in the ‘excess’ might actually be helpful.

The US, as the world’s largest economy, is likely to be only modestly affected. US consumers in particular will likely be only slightly impacted.

Europe is the most directly affected; thus, ANZ Research has reduced its GDP forecasts for the euro area (EA) by 1.5 percentage points, and for the UK by 1 percentage point for 2022. But that still leaves EA growth at 2.9 per cent and the UK at 4.0 per cent, both well above trend.

ANZ Research’s 2023 forecasts are little changed. And these downgrades haven’t affected ANZ Research’s view on the possible tightening cycles from the Bank of England and European Central Bank.

Spread

For some, China remains a growth worry, with COVID-19 lockdowns the most recent issue (which perhaps signals the direction of bias from most commentators at present). The spread of Omicron is clearly a very significant short-term challenge for GDP growth in that area.

The cross-country experience from this pandemic, however, is each subsequent wave of COVID-19 has tended to have a smaller impact than the preceding waves. There is little reason for China’s experience with Omicron to break that mould.

If anything, China has a more considered COVID-19 strategy than many other economies. Moreover, the country has adopted a reasonably ambitious growth target for 2022. The growth targets of recent years have been on some levels unambitious, at least partly as a signal the focus was on structural reform rather than cyclical endeavour.

China’s ambitious target for calendar 2022 seems to suggest cyclical dynamics are the key focus for policy at the present time. While 5.5 per cent growth in 2022 looks very ambitious – ANZ Research’s forecast is 5.0 per cent - it does suggest policy will be focussed on ensuring a vigorous rebound from Omicron.

Capacity

ANZ Research has trimmed its US growth forecast by 1 percentage point to a still very strong 3.5 per cent and maintained a 2023 forecast at a still-above-trend 2.5 per cent.

The downgrade primarily reflects an assessment the economy is at full capacity, and so additional demand is pulling in imports.

The deterioration in the US trade balance to record levels is beneficial for the Asian export story. This leaves global growth at 3.7 per cent in 2022, down from 4.0 per cent three months ago. ANZ Research’s forecast for 2023 is unchanged at 3.3 per cent.

With global growth only modestly affected, the main macro impacts of the conflict are likely to be on commodity prices and inflation, which leaves central bank tightening commensurately entrenched, if not exacerbated.

ANZ Research has added 100 basis points to its US Federal Reserve tightening profile for 2022 and 2023, to take the top end of fed fund range to 3.25 per cent by mid-2023.

While the global macro impacts of the conflict might be modest, like the pandemic, the distributional impacts are likely to be highly regressive.

Households are facing sharply higher energy costs and wage earners, in many economies, falling real wages. Inequality matters not just because it leaves individuals worse off, but because it affects aggregate economic outcomes. Inequality reduces GDP and raises vulnerabilities. ANZ Research hopes it grows as a policy focus.

Influence

This cocktail of influence does raise the hurdles for central banks struggling to balance the competing forces well to avoid a hard landing. ANZ Research’s forecasts currently extend to the end of 2023; the issues are not expected to be material over that timeframe.

ANZ Research is more watchful, however, about 2024. The past two years have been a period of particularly elevated uncertainty. Just when COVID-19 was potentially diminishing as an influence, geopolitical issues have remerged as a critical influence.

The uncertainty, however, is not one-sided. Both the pandemic and the crisis in Europe have the potential to surprise in a positive direction as well. The pandemic, in fact, may finally be diminishing as a macro influence. ANZ Research is hopeful the situation in Europe could evolve in a similar direction.

Richard Yetsenga is Chief Economist at ANZ Institutional

This story is an edited excerpt of the ANZ Research report “ANZ Research Quarterly: more rate hikes”, released March 24, 2022.