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Rising prices, the fallout from the war in Ukraine and persistent supply chain blockages slowed growth around the world in the first months of the year and hampered the efforts of major economies to recover from the pandemic.
The latest evidence came on Friday, when the European Union said the 19 countries that use the euro rose overall by just 0.2% in January, February and March compared with the previous three months.
A day earlier, the United States announced that its economy had shrunk by 0.4% over the same period. China, the world’s second-largest economy behind the United States, reported signs of significant weakness this month as another wave of Covid-19 caused widespread lockdowns.
“The overriding message is that the outlook for global growth is deteriorating and deteriorating at a faster pace and more severely than most analysts had expected,” said Neil Shearing, chief economist at the Capital Economics group.
There is significant variation in causes, as well as predictions, between the three major economic blocs.
Although total output in the United States contracted, analysts tended to be more optimistic about the outlook for the U.S. economy, noting that consumer spending was strong despite high inflation and the labor market remained tense. The slowdown during the first quarter was most likely the result of one-time measurement anomalies.
By contrast, China’s report of 4.8% growth in the first quarter masks how badly that economy is suffering from a slump in the real estate sector, overinvestment and pandemic-related shutdowns.
As for Europe, it is much more affected by the war in Ukraine.
The common problem they all face, however, is inflation.
“Growth around the world is moving at different speeds,” said EY-Parthenon chief economist Gregory Daco, but “inflation is present almost everywhere in most sectors.”
These diverging economic contexts can lead governments and central banks to choose different, and even contradictory, policies as countries attempt to curb inflation without tipping into recession.
In the United States, the Federal Reserve is determined to raise interest rates to bring down inflation, Daco said, while European governments may end up funneling more money to their citizens to ease the crisis. impact of rising energy prices. And China, he said, is caught in a bind: “They don’t want to give up their Covid-zero policy, but they realize that the drag on economic activity from this policy is huge.”
Even if the current list of risk factors – such as the coronavirus and the tensions between Russia and Ukraine – were all present at the start of the year, the economic outlook was much brighter then. Restrictions related to the Omicron variant of the coronavirus were beginning to ease in Europe and elsewhere, and it was hoped that the movement of goods and supplies around the world was about to resume.
But Russia’s invasion of Ukraine has created a shocking level of uncertainty and undermined economic confidence. The war and resulting sanctions imposed by the United States, Europe and their allies have worsened shortages of critically important food, energy and minerals, disrupting trade and pushing inflation to appalling levels.
China’s economy grew in the first quarter, but only slightly faster than in the last three months of last year, pointing to more problems ahead. The government responded to new Covid outbreaks with severe shutdowns and mass quarantines, which kept millions of workers and consumers in several cities at home. Shanghai, the country’s largest city, has been on lockdown for more than a month, while further closures of businesses and residential complexes were announced in Beijing on Friday.
Patrick P. Gelsinger, chief executive of Silicon Valley giant Intel, cited the Shanghai lockdown and war in Ukraine to warn on Friday that the shortage of computer chips plaguing tech, auto and of electronics from all over the world for more than a year. will continue “until at least 2024”. He made his remarks during a call with industry analysts.
Risks, particularly those related to a possible energy embargo and other disruptions caused by Russia’s invasion of Ukraine, have intensified. This week, Russia cut gas supplies to Poland and Bulgaria. At the same time, the European Union moved closer to an agreement to stop the flow of Russian oil.
The impact of a sudden stop in the supply of gas and oil has sparked heated debate. In Germany, which has Europe’s largest economy, the central bank recently warned that a gas embargo would lower the country’s economic output by up to 5% this year.
Some economists have offered more optimistic estimates, but Melanie Debono, senior European economist for Pantheon Macroeconomics, said a gas embargo would almost certainly push Germany into recession and “likely drag the rest of Europe down with it.” “.
In the first three months of this year, Germany’s gross domestic product – the broadest measure of economic output – rose 0.2%.
“The economic consequences of the war in Ukraine have had an increasing impact on short-term economic development since the end of February,” the Federal Statistical Office in Germany said on Friday.
In the euro area, growth varied. The Spanish economy performed slightly better than that of other European countries, with growth of 0.3% over the same period. Still, the improvement was much lower than the 2.2% seen in the last quarter of 2021.
In France, where Covid restrictions remained in place for much of the first quarter, growth came to a dead halt. In Italy, GDP fell by 0.2% compared to the previous three months.
“Clearly the picture for the first quarter is one of quite weak growth,” said Ángel Talavera, head of European economics at Oxford Economics. “Consumer confidence fell pretty sharply everywhere,” he noted, adding that household spending weakened as wages failed to keep pace with inflation.
Average growth among the 27 countries that make up the European Union was 0.4% in the first three months of 2022, said Eurostat, the statistical office of the European Union, double the figure reported for the eurozone.
Inflation has been a persistent thorn, hitting an annual rate of 7.5% in the euro zone in April from 7.4% in March, Eurostat said.
Food and other food prices have risen sharply. Although energy prices have fallen 3.7% this month, they are still more than a third higher than last year. “There is a compression of real household incomes,” said Ms Debono of the Pantheon.
Rising inflation could also test the resilience of the US economy. During the first quarter of this year, consumer prices rose at an annual rate of 7%, the fastest in four decades. Adjusting for inflation, after-tax income fell for the fourth consecutive quarter.
Even before this latest round of measurements, intense uncertainty had clouded the forecast. Last week, the International Monetary Fund revised its estimate for global growth to 3.6% from the 4.4% it forecast in January. Its estimate for the eurozone fell 1.1 points to 2.9% for the year.
Russia’s invasion of Ukraine “will have serious economic consequences for Europe, having struck when the recovery from the pandemic was still incomplete”, the IMF said in its latest regional outlook. “The war has led to sharp increases in commodity prices and aggravated supply-side disruptions, which will further fuel inflation and reduce household incomes and corporate profits.”
The outlook for the rest of the year could darken further.
“Overall, 2022 will be a year of significantly weaker growth than most analysts expect,” said Capital Economics’ Mr. Shearing.