A cold chill on the global economy

As fall approaches in the northern hemisphere, the global economy is experiencing a darkening of the sky.

In addition to the implications of the Ukrainian conflict, which we mentioned in our last barometer, the global monetary tightening and the many limitations on Chinese development portray a bleak picture. Short-term, the economy seems to be settling into a "stagflation" regime, characterized by essentially little growth and quickly increasing prices. Meanwhile, the likelihood of a worldwide recession becomes apparent. 

This is reflected in the overall negative adjustments to our GDP growth predictions for the current quarter. Our assessment adjustments are consistent with this reasoning and the multiple downgrades announced during the previous quarter. Eight nations (Italy, Denmark, Switzerland, Cyprus, Luxembourg, Malta, Egypt, and Chile) have been downgraded by Coface, compared to 19 in the second quarter. The 49 sector risk assessment downgrades demonstrate the obvious worsening of circumstances in sectors susceptible to the business cycle (construction, metals, and wood).

More than anyplace else, the clouds are especially ominous above Europe. As a result of the total suspension of the Nord Stream gas pipeline at the start of September, the energy crisis precipitated by the Russian invasion of Ukraine is worsening. As a result, the Old Continent is prepared for "forced" sobriety, as the European Union has finally agreed to a plan to limit gas usage. Several sectors have indicated restricting output in response to skyrocketing energy prices. As the area prepares to don its winter attire, its energy usage, particularly natural gas and electricity, would likely be restricted. Germany, the major industrial force on the continent, will be at the forefront of this issue.

Meanwhile, war-exacerbated inflationary pressures show no signs of abating. The major central banks, headed by the Federal Reserve (Fed) of the United States, continue to combat inflation with vigor. Most advanced economies (United States, Canada, Europe, United Kingdom, Australia, etc.) have already returned to key interest rate levels not seen in the last decade, breaking the low-interest rate environment that prevailed following the global financial crisis (2008-2009), particularly in the advanced economies. They are strengthening their attempts to contain inflation, unfazed by the rising indicators of a downturn in economic growth. 

Central banks risk driving the global economy into a significant slowdown or possibly a recession due to their culpability - sometimes unjustly - for releasing the inflation genie. This is especially pronounced in the case of the Federal Reserve, whose aggression is leading to further monetary tightening in other countries, notably emerging markets, in an attempt to prevent the devaluation of their currencies against the US dollar (a reverse "currency war"). If this tightening of global monetary and financial conditions continues at the present rate, it poses an evident danger to global economic development and stability.

In addition to this already bleak outlook, the Chinese economy is having difficulties: the real estate crisis continues to boil, and the "zero-COVID" policy continues to penalize domestic activity, with ramifications for supply chains in Asia, Europe, the Americas, and Africa. Even if there is widespread anticipation that this regulation would be eased following the 16 October Chinese Communist Party Conference, the health condition (poor immunity) and the upcoming winter do not call for a quick relaxation.

Although there are many causes of risk and unpredictability, new political disruptions may join them. First, the new geopolitical environment created by Russia's activities might reignite dangers in other global flashpoints. In addition, pricing pressures, especially on essentials, continue exacerbating the economic and health catastrophe that the epidemic precipitated over three years ago, adding to the complaints. 

In this research, as annually in the third quarter, Coface reveals the quarterly update of its social and political fragility index findings. Although the index has fallen from its record high last year, it still indicates a high-risk environment. Although the spotlight inevitably swings to the potential of unrest in developing economies, this increase in societal tensions is not anticipated to spare mature nations.

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