The Summer EU Commission’s Economic forecast gives a good overview of what is hitting the European and World Economy, namely:-
- The escalation of tensions between Russia and the EU, as a result of the Russian invasion of Ukraine, resulted in additional upward pressures on gas prices.
- Intensifying and broadening inflationary pressures are prompting faster normalisation of monetary policy in the euro area i.e. higher interest rates.
- The US economy is set to decelerate fast.
- The damage from the strict lockdowns implemented in China appears larger than previously expected.
- Consumer confidence plummeted and the household saving rate reversed course in the first quarter.
- Logistic and supply chain disruptions continue to hamper global activity, though signs of easing are emerging.
All the above has immediate, short-term and medium term economic effects which the reports lists as being the following:-
- The above mentioned background set the EU economy on a path of lower growth and higher inflation compared to the Spring Forecast, in Q1 2022. Global economic activity also slowed down in the first quarter of 2022, due to the above mentioned headwinds. The global growth momentum weakened further in Q2 2022. While remaining in expansionary territory Global PMIs declined. The slowing growth momentum was driven by an important slowdown in China.
- Metal and food prices have retreated in recent weeks. The prices of important metals used for construction and electrification like copper, steel and aluminium fell strongly since the Spring Forecast, reflecting the slowdown in global demand. Food prices also moderated in recent weeks, but are still up by 30% compared to the same period in 2021, with cereal prices (e.g. wheat) affected the most by the war in Ukraine
- Going forward, based on futures the prices of oil and agricultural commodities are expected to moderate. Markets expect oil price pressures to abate in 2023 on the back of additional supply from non-OPEC countries as well as weaker global outlook. The global supply of cereals is expected to decline in 2022 amid lower exports from Ukraine and rising input prices (e.g. fertilisers, energy). The increase in cereal prices also affects the price of meat production, as it increases feed costs. The futures curve for wheat shifted down compared to spring, but remains relatively flat, suggesting that markets expect wheat prices to remain at elevated levels in 2023.
- In the near term gas and electricity prices are set to keep rising in Europe. While gas storage levels in Europe have increased to almost 60%, almost double the rate in winter, uncertainty about flows from Russia mainly, but also hiccups in US LNG supply and maintenance of nuclear power plants in France, are keeping gas prices in Europe at elevated levels.
- The outlook for the US and China is weaker than in spring. In the US, tightening monetary policy and a drag on consumption from persistently high inflation are behind a tangible downward revision to growth in 2022 and 2023. However, a resilient labour market, strong corporate investment and still elevated excess household savings should support growth. Growth has also been revised lower for China as there are clear indications that the property sector, a mainstay of growth during the past years, is facing challenges, if not an outright decline. Global activity and EU external demand have been revised down compared to the Spring Forecast. Despite a general reopening of most economies, the outlook is hampered by the impact of the war on commodity markets, declining sentiment and an accelerated tightening of global financing conditions.
- Global inflation is expected to remain high until the end of summer 2022 and gradually moderate towards the end of 2022 and into 2023. Part of the decline in 2023 is due the slowdown in global demand which will alleviate current supply pressures and input costs.
Taking all into account, the updated economic forecast is that real GDP will grow by 2.7% in 2022 and 1.5% in 2023 in the EU and by 2.6% in 2022 and 1.4% in 2023 the euro area. The projected annual growth rate for this year is propped up by the momentum gathered with the recovery of last year and a stronger first quarter than previously estimated. Both bring acquired growth at the first quarter of this year to a solid 2.7% for the EU and 2.4% for the euro area. Economic activity is expected to have weakened in the second quarter, but should regain some traction during summer, thanks to a promising tourism season. In 2023, economic growth is expected to gather some momentum, on the back of a resilient labour market, moderating inflation, support from the Recovery and Resilience Facility and a still large amount of excess savings. However, on an annual basis there is a downward revision of almost one percentage point compared to the Spring Forecast.
With regards Malta, we are managing to register the lowest inflation rate accross Europe, mainly due to government’s direct intervention to cushion the rise in costs related to energy and grains. Inflation accross Europe, in June, ranged from 6.1% in Malta to 22% in Estonia. In 2022, the report forecasts a real GDP growth of 4.9% for Malta’s economy, which is higher than projected in spring, given the expected stronger gains in the services sector, although tampered by the negative impacts of Russia’s invasion of Ukraine. Growth in 2022 is expected to be driven by domestic consumption and net exports. The export of tourism services in Malta is on course to a very rapid rebound in 2022 with full recovery expected by 2023, contributing to growth in both years. In 2023, real GDP is forecast to increase at a slower pace at 3.8%, affected by a general economic slowdown of its main trading partners, but partially compensated by continued growth of tourism and other services exports. Notwithstanding all government’s efforts to cushion the impact of inflation, the rising international energy and commodity prices are affecting Malta’s prices indirectly with annual inflation in 2022 set to rise to 5.6%. The increases in food, transport and imported goods prices, and a continued recovery in the tourism and hospitality services are set to drive up price pressures also in 2023, with inflation remaining elevated at 3.3%.
As with any forecasts, the above economic forecasts are taken on a number of assumptions. There is therefore the risk that these assumptions do not materialise. Risks to the forecast for economic activity and inflation are heavily dependent on the evolution of the war. Further increases of gas prices could strengthen the stagflationary forces currently at play. Second round effects could amplify these forces and lead to a sharper tightening of financial conditions that would not only weigh on growth, but also on financial stability. At the same time, recent downward tendencies of oil and other commodities’ prices could intensify, bringing about a faster deceleration in inflation. Moreover, private consumption could prove more resilient to increasing prices if households were to use more of their savings. Finally, COVID-19 remains a risk factor.