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Towards a global economic crisis? These worrying signals

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Towards a global economic crisis?  These worrying signals
Written by madishthestylebar

The successive crises since the start of the Covid-19 pandemic pose a threat to the global economy. Some countries should not escape recession in the coming months.

Covid-19, war in Ukraine, geopolitical tensions, unprecedented episodes of drought… “The moment we are living through may seem to be structured by a series of serious crises (…) and some may see our destiny as being perpetually manage crises or emergencies,” Emmanuel Macron said on Wednesday at the opening of the Council of Ministers.

During his speech in a serious tone, the Head of State said he believed “that what we are going through is of the order of a great shift or a great upheaval” of the world. Basically, we are living through the end of abundance, that of cash without cost – we will have to draw the economic consequences – that of products and technologies that seemed to us to be perpetually available, the break in value chains. The scarcity of this or that material or technology reappears, like that of water. We will have arrangements to make,” added the President of the Republic.

In the process, the High Commissioner for Planning François Bayrou said he was on the same line as Emmanuel Macron, going so far as to fear “the most serious crisis that France has known since the war”. Catastrophism or lucidity? The future will tell. What is certain, however, is that the events of recent months are already affecting the French economy and the global economy more broadly. Certain signs are there to testify to this. The risk of recession is getting stronger every day.

• Global inflation

As a result of the disruptions in world trade during the post-Covid recovery and then the war in Ukraine, the generalized rise in prices now affects all regions of the world: 8.9% in the euro zone in July over one year, 10.1% in the United Kingdom, 8.5% in the United States, 7.8% in South Africa. Levels not seen for several decades. In Asia, inflation remains moderate but is accelerating month after month. In particular, it stood at 2.7% in China in July and 2.3% in Japan.

Faced with soaring prices, central banks stepped up to the plate, although too late for some. To cool the economic machine, at the risk of seriously hampering growth, the Fed announced at the end of July its fourth increase in key rates since March across the Atlantic. In the United Kingdom, the Bank of England has used this lever several times since December, while the ECB raised its rates for the first time in ten years a few weeks ago.

If the action of the central banks is intended to slow inflation, raising key rates will not stop the soaring prices overnight. In France, the inflation rate is expected to be close to 7% at the end of the year, against 6.1% today (6.8% in HICP). The situation is even more worrying across the Channel where the Bank of England expects more than 13%.

In the end, inflation should reach 6.6% on average in developed countries this year and 9.5% in emerging countries, according to IMF forecasts. That is an upward revision of 0.9 and 0.8 points compared to the latest forecasts. The monetary institution also expects that “it will remain high for longer”.

• Soaring energy prices and risk of shortages in Europe

Oil, gas, electricity… Energy prices have peaked in recent months. Started in the second half of 2021 against a backdrop of strong recovery in the global economy, the surge intensified with the war in Ukraine. The price of European natural gas in particular has exploded and quadrupled (+315%) since the start of the year. On Wednesday, it briefly exceeded 300 euros per megawatt hour, a level not seen since the historic record recorded in March, at the start of the Russian invasion of Ukraine.

In question, the announcement by Gazprom of a complete suspension of the supply of gas to Europe via Nord Stream 1 for a period of three days from August 31 to September 2. Prices were also supported by climatic conditions in Europe, between droughts and heat waves, “which led to an increase in energy demand for air cooling”, explain Societe Generale analysts. They also cite among the bullish factors the effort of European nations to replenish their stocks of natural gas before winter, an undertaking all the more ambitious “with still weak gas flows through the main gas pipeline supplying Western Europe. “.

This recent surge in prices has also caused electricity prices to soar for next year in France and Germany, without reaching the historic records reached earlier in the week. From now on, the Old Continent, which is trying to do without Russian gas, is preparing for a difficult winter. In several European countries, restrictions on energy consumption have already been put in place to limit the risk of shortages. In France, while Emmanuel Macron spoke of the “end of abundance”, “a great sobriety plan” will be presented soon.

• Growth forecasts revised downwards

At the end of July, the IMF updated its growth forecasts, with a clear observation: “the three largest economies in the world (United States, China, Eurozone) are marking time, and the consequences for the global outlook are significant “. The Washington institution thus expects global growth of 3.2% this year and 2.9% in 2023, i.e. a deterioration of 0.4 and 0.7 points compared to the April forecasts.

In detail, activity in the United States should grow by only 2.3% this year and 1% next year. At 3.3%, Chinese growth in 2022 should stand at its lowest level in more than forty years (excluding the pandemic). Finally, that of the euro zone is estimated at 2.6% this year and 1.2% in 2023.

Forecasts revised downwards that the Washington institution justifies by referring in particular to the “negative repercussions of the war in Ukraine” with “stronger than expected inflation” in the United States and Europe, as well as a slowdown “more pronounced than expected” in China “against the backdrop of Covid-19 outbreaks and confinements”. So much so that global production contracted in the second quarter of this year.

Added to this is the tightening of monetary policies which should accentuate the slowdown in the global economy. Even bring some countries into recession. Moreover, even if the subject is debated across the Atlantic, the United States is already technically in recession since the American economy has contracted for two consecutive quarters. In the United Kingdom, the Bank of England forecasts a contraction in production each quarter between the last three months of 2022 and the last three of 2023. Then, “growth will remain weak”.

The euro zone is still avoiding recession. But Bruno Le Maire himself has not ruled out the possibility of a serious deterioration in activity in the coming months: “everything will depend on Vladimir Putin’s decisions on gas. If he ever decides to cut the gas for the EU and the euro zone, we estimate the impact on growth, for France alone, at half a point of GDP, and probably more for other economies more dependent on Russian gas than us”, declared the Minister of the Economy on Wednesday on France 5. “It is on the question of Russian gas that part of the growth in Europe will be played in the coming months”, he added.

In France, growth rebounded stronger than expected in the second quarter, to +0.5%. But this relative improvement is partly explained by the return of foreign tourists, while household consumption continued to decline. The signals for the French economy in the coming months are also hardly encouraging.

Witness the latest PMI indices published by S&P Global. These indices are leading indicators of private sector activity, i.e. they take the pulse of the economy before the end of a given period, by probing the opinions of purchasing managers of large companies.

France’s latest PMI indices, released on Wednesday, turned out to be gloomy. In August, the composite PMI index, which includes activity in services and industry, fell to its lowest level in 18 months at 49.8. An indicator below 50 in a given month means that activity has contracted. “The end of 2022 promises to be difficult for European economies and France is by no means an exception,” warned Joe Hayes, economist at S&P Global Intelligence.

The figures for the eurozone as a whole are no better. The August Composite PMI for the Eurozone fell to an 18-month low also for the Eurozone, at 49.2. Economists at Barclays Bank, however, point out that France was the country which suffered the greatest deterioration in August. In view of these indicators, the British establishment confirmed that it was counting on an entry into recession in the euro zone in the second half.

• Risk of food crisis

On Wednesday, the World Food Program (WFP) warned of the dramatic increase in the number of people facing acute food insecurity since the Covid-19 crisis. They would be 345 million today, against 135 million three years ago.

A jump linked to the consequences of the pandemic, climate change (droughts, floods) and the war in Ukraine which is driving up world food prices and slowing down exports to countries in Africa and the Middle East.

“The world simply cannot afford this,” said Corinne Fleischer, WFP regional director. “We are seeing now that there is ten times more displacement around the world due to climate change and conflict and of course it is all linked. So we are very concerned about the cumulative effect of COVID, the change climate change and the war in Ukraine,” she added.

Paul Louis with Julien Marion

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