Macro Analysis /
Global

Economics Chartbook - Central banks walk a thin line (2Q22)

    Marco Valli
    Marco Valli

    Head of Macro Research

    UniCredit
    30 March 2022
    Published by
    • Global: The economic outlook has worsened. We see global GDP growth of 3.3% this year (from 4.2%) and 3.4% next year (from 3.7%). The Russia-Ukraine crisis has caused a sharp rise in commodities prices and inflationary pressure, further global supply-chain disruption, a tightening of financial conditions, heightened uncertainty and a sharp drop in consumer confidence. Rising COVID-19 cases, notably in China, pose additional risks. Global central banks will walk a thin line as the growth-inflation trade-off deteriorates.
    • US: We expect GDP growth of 3.0% this year and 2.2% next year, which includes a cumulative 0.3pp reduction in growth due to the Russia-Ukraine crisis. US trade and financial linkages with Russia and Ukraine are relatively small and the US economy entered the crisis in a good place, with strong household balance sheets and a very tight labor market. After likely peaking at about 8.5% yoy in the coming months, we see headline CPI inflation declining to moderately above 2% in 2023 due to base effects, lower energy prices, demand moderation and some improvement in supply bottlenecks. We now expect the Fed to hike by 125bp in the remainder of this year, up from 100bp previously, but still see the peak for the federal funds rate at 2-2.25% next year.
    • Eurozone: Assuming that Russia continues to export oil and gas to Europe, we forecast GDP in the eurozone to expand by 3.1% this year and 2.5% in 2023. This growth trajectory is about 1pp lower than before the Russia-Ukraine conflict started. An easing of pandemic restrictions, still large amounts of excess savings for households and targeted fiscal stimulus are important mitigating factors. Our inflation forecast for 2022 has surged to close to 7%, followed by a decline to an average rate of about 2% in 2023. Facing a worsened trade-off between lower growth and higher inflation, the ECB confirmed its hawkish pivot and announced a plan to speed up the reduction of net asset purchases in 2Q22, aiming to end QE in 3Q22. We still expect two 25bp hikes in 1H23, although risks have shifted toward a first move taking place already before year-end.
    • CEE: We expect the Russian economy to shrink by around 12% this year (peak-to-trough of around 20%), with a muted rebound in 2023 akin to stagnation. In EU-CEE and in the Western Balkans, GDP is expected to grow by around 2.3% in 2022 and by 3.6% in 2023. For this group, we estimate the direct impact of the conflict on GDP growth at 1.5-3pp in 2022 and up to 1.5pp in 2023. Turkey could grow by around 4% this year and 3.8% in 2023. If the EU stops importing oil and gas from Russia, the Russian economy could shrink by around 20% this year and fail to rebound in 2023. In such a scenario, EU-CEE and the Western Balkans would probably fall into recession. Inflation could reach 30-year highs due to rapidly rising commodity prices and supply-chain bottlenecks, prompting additional rate hikes and FX interventions.
    • UK: We forecast GDP growth of 3.4% this year and 1.8% next year, after revising down growth by a cumulative 0.6pp due to the Russia-Ukraine crisis. The UK imports little from Russia but, as a net importer of commodities, it faces a substantial terms-of-trade shock. Inflation will likely peak at about 8.5% yoy in April and stay high through 3Q23 before falling below 2% in 4Q23. The MPC will likely raise the bank rate to 1.25% by August and then stop.
    • China: We expect GDP to grow 4.7% in both 2022 and 2023. New outbreaks of COVID-19 that are forcing millions of Chinese into new lockdowns will likely weigh on economic performance in 1H22, adding to headwinds from the Russia-Ukraine conflict, rising commodity prices and real estate vulnerabilities. However, the government has signaled it will deploy further policy support to ensure stable economic performance and mitigate domestic and external growth headwinds. An easing in fiscal and monetary policy is likely.