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‘The economic outlook is not good at the moment’

17:57 12/05/2022
An ING expert explains how markets and the global economy have been battered by the pandemic and war in Ukraine

When the war in Ukraine broke out, the world’s economy and financial markets were only just recovering from the havoc wreaked by the Covid-19 shutdowns. That’s why both supply chain problems and inflation are so pronounced right now, according to ING economist Charlotte de Montpellier, who says Russia’s invasion of Ukraine has compounded many of the pandemic’s effects on the economy.

How would you describe the current global economic outlook?

Any discussion of the outlook for the financial markets and the economy must begin with the war in Ukraine. This has delivered a very large shock to the economy that has resulted in a number of impacts. Supply chain problems and rising import and commodity prices around the globe have for instance created a very difficult context for companies, while consumers are seeing higher prices across their basket of goods. This is exacerbated by the lockdowns in China. All in all, the economic outlook is not good at the moment.

What about the financial markets?

They are of course impacted by the economic outlook. Inflation is well above 2%, the level preferred by central banks. It’s why central banks have started to increase interest rates to curb inflation, which in turn has resulted in turbulent financial markets.

But it’s important to note that markets tend to respond to what they think will happen next. That means all these impacts – the shocks to the economy, increased inflation and rising interest rates – are already reflected in the current value of share prices. So if the global conflict does not deteriorate further, the situation could remain stable or even improve from now.

So as far as the outlook for the financial markets is concerned, the worst is over, so to speak?

Well, the situation on the financial markets could deteriorate if there are new developments regarding Covid in China, the aftermath of rising interest rates or the war. For instance, if Nato would get involved actively in the conflict leading to escalation, or if shortages of a particular imported good are revealed to be much steeper than expected. That could also send share prices tumbling.

How are rising energy prices specifically affecting financial markets and the economy?

In Europe, the main reason behind rising inflation is the strongly increased energy prices that we’ve seen in recent months. Increased energy costs have led some companies in highly energy-dependent sectors to limit or cease production. Energy costs are also taking a bigger bite out of consumers’ household budgets, as a result of which they have less money to spend on other items. That is resulting in decreased consumption. It’s also affecting government budgets because they are introducing costly support measures to help consumers and companies weather the rising energy prices. Belgium, and European countries more generally, have especially been affected as they mostly import energy – unlike the US, which is an energy producer. As a result, increased energy prices are almost like an external tax from abroad on the European economy.

What has the post-Covid impact been on the economy?

At the end of 2021, we saw the same activity levels as before the Covid-19 pandemic. But we didn’t see the level of activity we would have seen in 2021 if the health crisis had not occurred. In other words, the global economy is still feeling the effects of the shutdowns, disruptions and supply chain problems caused by the pandemic. That’s why inflation and supply chain problems are so pronounced at the moment. The pandemic had already intensified both developments and now the war in Ukraine and lockdowns in China have been added on top.

Covid-19 is still a major factor in China. Several large cities there have seen lockdowns or other measures, which has impacted local production processes, supply chains and trade. Because companies around the globe are dependent on China for the production of goods, this is further deteriorating the global economic outlook. So we cannot say we’re in a post-Covid world today.

Is there any positive news at all?

As economists, we have admittedly had to downgrade many forecasts for the European economy. But we don’t expect to see a negative growth number for the European economy in 2022. In other words, we are not looking at a deep, long-lasting crisis. At the moment, we think the next one to two quarters will be strongly affected, but the impact will start to become less significant after that.

Another silver lining would be that European leaders are working together and strategically reflecting on their gas supplies as a result of the war in Ukraine. We can expect European integration to be stronger after this year and the pace of the energy transition to accelerate too.

This article was first published on the Expat Time site of ING Belgium, April 2022

Photo: Charlotte de Montpellier (c) ING Belgium

Written by The Bulletin in association with ING Belgium

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