Rising prices, the aftermath of the war in Ukraine and ongoing supply chain bottlenecks slowed global growth in the first few months of the year and hampered efforts by major economies to recover from the pandemic.
The latest evidence came on Friday when the European Union said the 19 countries using the euro grew by just 0.2 percent overall in January, February and March compared to the previous three months.
A day earlier, the United States announced that its economy had shrunk by 0.4 percent 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 prompted widespread lockdowns.
“The overarching message is that the global growth outlook is deteriorating, deteriorating faster and more seriously than most analysts expected,” said Neil Shearing, group chief economist at Capital Economics.
There are significant differences in the causes and forecasts between the three major economic blocs.
Although overall manufacturing in the United States contracted, analysts tended to be more optimistic about the outlook for the US economy, noting that consumer spending was strong despite high inflation and the labor market remained tight. The downturn in the first quarter was most likely the result of one-off measurement errors.
In contrast, China’s report of 4.8 percent growth in the first quarter masks how badly this economy is suffering from a slump in the real estate sector, overinvestment and pandemic-related shutdowns.
Europe is much more affected by the war in Ukraine.
However, the common problem they all face is inflation.
“Growth around the world is developing at different speeds,” said Gregory Daco, chief economist at EY-Parthenon, but “inflation is almost ubiquitous in most sectors.”
These different economic environments can result in governments and central banks adopting different or even conflicting policies as countries attempt to rein in inflation without slipping into recession.
In the United States, the Federal Reserve is firmly committed to raising interest rates to bring down inflation, Mr Daco said, while governments in Europe may be passing more money on to their citizens to mitigate the 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 recognize that economic activity is being severely weighed down by this policy.”
Although the current risk factors — like the coronavirus and tensions between Russia and Ukraine — were all in place earlier in the year, the economic outlook was much brighter back then. Restrictions related to the Omicron variant of the coronavirus were beginning to ease in Europe and elsewhere, and there were hopes that the movement of goods and supplies around the world would soon pick up again.
But Russia’s invasion of Ukraine brought staggering levels of uncertainty and eroded economic confidence. The war and resulting sanctions imposed by the United States, Europe and their allies have exacerbated shortages of food, energy and essential minerals, disrupted trade and pushed inflation to staggering levels.
China’s economy grew in the first quarter, but at a pace little faster than the last three months of last year, signaling more trouble ahead. The government has responded to renewed Covid outbreaks with severe lockdowns and mass quarantines that have kept millions of workers and consumers at home in several cities. Shanghai, the country’s largest city, has been shut down for more than a month, while more business and residential complex closures were announced in Beijing on Friday.
Patrick P. Gelsinger, CEO of Silicon Valley giant Intel, cited the lockdown in Shanghai and the war in Ukraine to warn on Friday that computer chip shortages have been threatening tech, auto and electronics companies worldwide since more than a year will continue “until at least 2024”. He made his remarks on a call with industry analysts.
Risks, particularly related to a possible energy embargo and other disruptions caused by the Russian invasion of Ukraine, have increased. This week Russia stopped gas supplies to Poland and Bulgaria. At the same time, the European Union has come closer to an agreement to stop the flow of Russian oil.
The implications of an abrupt halt to gas and oil supplies have sparked heated debate. In Germany, Europe’s largest economy, the central bank recently warned that a gas embargo would cause the country’s economic output to collapse by up to 5 percent this year.
Some economists have given more optimistic estimates, but Melanie Debono, senior Europe economist at Pantheon Macroeconomics, said a gas embargo would almost certainly plunge Germany into recession, likely “dragging the rest of Europe with it.”
In the first three months of this year, German gross domestic product – the broadest measure of economic output – grew by 0.2 percent.
“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 announced on Friday.
Growth varied within the eurozone. The economy in Spain developed slightly better than in other European countries and grew by 0.3 percent in the same period. Still, the improvement was much smaller than the 2.2 percent recorded in the final quarter of 2021.
Growth stalled in France, where Covid restrictions remained in place for much of the first quarter. In Italy, GDP fell by 0.2 percent compared to the previous three months.
“The picture for the first quarter is clearly quite weak growth,” said Ángel Talavera, head of European economics at Oxford Economics. “Consumer confidence has fallen pretty sharply everywhere,” he noted, adding that household spending has slowed as wages have failed to keep up with inflation.
Average growth in the 27 countries of the European Union was 0.4 percent in the first three months of 2022, twice as much as for the eurozone, according to Eurostat, the statistical office of the European Union.
Inflation has been a persistent thorn, rising from 7.4 percent in March to an annual rate of 7.5 percent in April across the euro zone, Eurostat said.
Food and other prices rose sharply. Although energy prices fell 3.7 percent this month, they are still more than a third higher than a year ago. “There is a bottleneck in real household incomes,” Pantheon’s Ms Debono said.
Rising inflation could also test the resilience of the US economy. In the first quarter of this year, consumer prices rose 7 percent annually, the fastest in four decades. Adjusted for inflation, after-tax receipts fell for the fourth straight quarter.
Even before this last round of measurements, the great uncertainty had clouded the forecasts. Last week, the International Monetary Fund revised its estimate of global growth to 3.6 percent from the 4.4 percent it forecast in January. Its estimate for the euro zone declined 1.1 points to 2.9 percent for the year.
Russia’s invasion of Ukraine “will have serious economic consequences for Europe as recovery from the pandemic is ongoing,” the IMF said in its latest regional outlook. “The war has led to sharp increases in commodity prices and increased supply-side disruptions, which will further fuel inflation and eat away at household incomes and corporate profits.”
The outlook for the remainder of the year could deteriorate further.
“Overall, 2022 will be a year in which growth will be significantly weaker than most analysts expect,” said Mr. Shearing of Capital Economics.
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