U.S. Economy: Inflation remains worryingly high

The US economy contracted by 0.4 percent in the first quarter of 2022 compared with the previous quarter (annualized 1.4 percent). However, this was mainly due to the fact that exports declined significantly as a result of the low momentum of the global economy. Public sector consumption was also down. In addition, companies were somewhat more reluctant to build up inventories than in the final quarter of 2021, when they had replenished their stocks exceptionally strongly. Encouragingly, however, both private consumption and investment increased at solid rates.

Positive growth rates can be expected again in the further course of the year. However, the US economy will not grow strongly. The headwinds are too strong: Inflation, war in Ukraine and lockdowns in China are weighing on further development. In addition, monetary policy is becoming more restrictive. The U.S. Federal Reserve will continue to raise interest rates and also start to shrink its balance sheet. However, despite continuing interest rate increases, inflation will remain elevated and will probably only gradually decrease. In May, inflation increased by 1.0 percent compared to April. Within one year, inflation increased by 8.6 percent, which is worryingly high.

For 2022 as a whole, I expect economic growth of only 1.7 percent followed by 1.9 percent in 2023. Inflation will remain high this year with an annual average of more than 7.0 percent. In 2023 however, I expect inflation of somewhat less than three percent.

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Ukraine war and pandemic situation in China continue to slow down German economy

The war in Ukraine and the Chinese corona crisis have a noticeable impact on the German economy and fuel inflation. There are also signs of a subdued global economic trend, which is likely to have a noticeable impact on Germany as an export-oriented economy. In view of the difficult environment, the German economy is still holding up well. Nevertheless, gross domestic product is likely to contract somewhat temporarily in the second quarter. Between January and March, gross domestic product has already increased by only 0.2 percent.

The economic risks for the German economy are enormous. In addition to the war, the widespread lockdowns in China are also putting the brakes on the economy. Above all, the already existing supply bottlenecks are thus being further exacerbated. German industry’s order books are still full, but the shortage of materials is severe. In addition, in view of the uncertain global political situation, some companies are trying to replenish their inventories, which further increases the shortages of inputs. Services, which suffered greatly during the pandemic, are less affected by international tensions and supply shortages. In addition, the increasing easing of Corona protection measures is having a stimulating effect. However, high inflation is reducing purchasing power and thus slowing growth in consumption.

Inflation is increasingly becoming an additional drag on the German economy. Energy prices are likely to remain elevated for the foreseeable future. Inflation, which has so far been driven to a significant extent by energy prices, is thus likely to recede only slowly. Consumer prices are expected to rise by more than six percent in the current year, which would be the highest rate in 40 years. There is also cause for concern because prices are rising not only for energy, but also for other goods such as food. In addition, problems with international supply chains have driven up the cost of inputs, and many companies are able to pass these on to consumers in the face of still solid demand for the time being.

   

Time and again, the European Central Bank has been accused of holding on to an expansionary monetary policy for too long and thus being partly to blame for high inflation. Many of these accusations are exaggerated. It is true that the ECB has to accept the accusation that it underestimated the risks of inflation. But the sharp rise in prices is primarily due to factors that have nothing to do with monetary policy – such as the gratifyingly rapid economic recovery from the Corona pandemic, expansionary fiscal policy in the U.S., lockdowns in China and now the war in Ukraine instigated by the Russian president. What cannot be dismissed, however, is that such extraordinary events are more likely to lead to stubbornly high inflation in an environment of low interest rates and securities purchases. With economic recovery stalled in many countries and high inflation rates, the ECB now faces the balancing act of curbing inflationary pressures without further worsening the economic situation. In addition, the euro member states are not affected by war and inflationary pressure to the same extent. Germany, for example, could be more affected economically than France or the Netherlands. All the more reason, therefore, for Germany and the euro zone as a whole to increase the productivity of the economy by investing in the future. In the medium term, this would be one of the best ways to counter low interest rates and inflation risks.

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It’s Never Too Early to Teach Financial Responsibility

One of the many jobs we have as parents is to raise financially responsible and literate children. But it isn’t always easy. Thankfully, there are several small steps you can take to help your children better understand personal economics, even when math isn’t your strong suit.

Below, today’s Eagle and Bear Economist guest post by Patrick Young presents tips for parents on how to raise fiscally responsible children.

Open a bank account

If your son or daughter is at least 13 years old, they may qualify for a joint checking account, complete with a debit card. While this is a great way to teach them how to spend responsibly, consider opening a savings account as well to show them how to segment their money into two categories: spending and saving. Make sure to put at least one other trusted legal guardian on their account with them so they can access their money in a pinch if you’re not available.

Teach them about big expenses early

Your teen or tween may be a decade or more away from homeownership, but it’s never too early to explain the concept of using credit responsibly and saving for the big expenses in life, such as purchasing a house. Talk to them about what a loan is and how interest rates work. If you’re not quite sure yourself, spend some time researching mortgage interest rates today and brushing up on the difference between VA, FHA, and conventional loans. Talk to your children about affordability and discuss reasons that they should not live outside of their means (for example, if their home is too expensive and their income declines, they may lose their investment). Teach them about the real estate market and how major assets can help them build their personal wealth.

Show them how to make their own money

Kids like money, and they especially like your money. But, mom and dad can’t always have a revolving wallet. As your children get older, talk about how to earn their own money. They might, for example, start their own small business mowing yards in the neighborhood or making jewelry to sell to family and friends. If they are dead broke and need capital, teach them about the different types of investments, from angel investors to crowdfunding. You might also create a loan or microloan application for them to fill out. This is also a great opportunity to let them see how interest works on a small scale. PTMoney mentions several other great income opportunities for teens.

Use fun charts and graphs

Many children are visual learners and may not fully grasp the concept of saving in an abstract environment, such as a bank account they can’t see and feel. For these kids, consider using their favorite candies and mason jars to help them see how close they are to their savings goals. (You can buy giant bags of Skittles online!)

Let them set goals

Let children set financial goals for themselves. This could be something as simple as earning enough money to buy a pack of Pokémon cards each week or buying their own PlayStation or a new bicycle. Another idea here is to have them save for the difference between “standard” items and luxury items or name-brand clothing.

Your children will mimic everything you do, and you are their best teacher. Although money isn’t everything, it’s necessary throughout their lifetime, especially as they enter adulthood and go to start a business or buy a home. Teach concepts that will help them ease into these processes early, and your children may not struggle or stress their finances nearly as much as they will be prepared and armed with knowledge.

By Patrick Young from AbleUSA.info

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U.S. Economy: Growth dips amid high inflation

The US economy contracted by 0.4 percent in the first quarter of 2022 compared with the previous quarter (annualized 1.4 percent). However, this was mainly due to the fact that exports declined significantly as a result of the low momentum of the global economy. Public sector consumption was also down. In addition, companies were somewhat more reluctant to build up inventories than in the final quarter of 2021, when they had replenished their stocks exceptionally strongly. Encouragingly, however, both private consumption and investment increased at solid rates.

Positive growth rates can be expected again in the further course of the year. However, the US economy will not grow strongly. The headwinds are too strong: Inflation, war in Ukraine and lockdowns in China are weighing on further development. In addition, monetary policy is becoming more restrictive. In terms of inflation, I expect a somewhat more pronounced slowdown than in other forecasts. However, inflation will remain elevated. The U.S. Federal Reserve will continue to raise interest rates and also start to shrink its balance sheet.

For 2022 as a whole, I expect economic growth of only 2.0 percent followed by 1.8 percent in 2023. Inflation will remain high this year with an annual average of 6.8 percent. I also expect inflation of 2.6 percent in 2023.

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German economy slowed by war, inflation and Chinese lockdowns

Following Russia’s invasion of Ukraine, the outlook for the German economy has deteriorated. High energy prices are fueling inflation and uncertainties regarding the further course of the war and energy supplies are weighing on economic development. A decline in economic output in the second quarter of 2022 would therefore come as no surprise. Economic indicators such as the ifo business climate index and the GfK consumer climate index have been pointing to weaker development since the start of the war. Between January and March, gross domestic product has already increased by only 0.2 percent.

The economic risks for the German economy are enormous. In addition to the war, the widespread lockdowns in China are also putting the brakes on the economy. Above all, the already existing supply bottlenecks are thus being further exacerbated. German industry’s order books are still full, but the shortage of materials is severe. In addition, in view of the uncertain global political situation, some companies are trying to replenish their inventories, which further increases the shortages of inputs. Services, which suffered greatly during the pandemic, are less affected by international tensions and supply shortages. In addition, the increasing easing of Corona protection measures is having a stimulating effect. However, high inflation is reducing purchasing power and thus slowing growth in consumption.

Inflation is increasingly becoming an additional drag on the German economy. Energy prices are likely to remain elevated for the foreseeable future. Inflation, which has so far been driven to a significant extent by energy prices, is thus likely to recede only slowly. Consumer prices are expected to rise by more than six percent in the current year, which would be the highest rate in 40 years. There is also cause for concern because prices are rising not only for energy, but also for other goods such as food. In addition, problems with international supply chains have driven up the cost of inputs, and many companies are able to pass these on to consumers in the face of still solid demand for the time being.

   

Time and again, the European Central Bank has been accused of holding on to an expansionary monetary policy for too long and thus being partly to blame for high inflation. Many of these accusations are exaggerated. It is true that the ECB has to accept the accusation that it underestimated the risks of inflation. But the sharp rise in prices is primarily due to factors that have nothing to do with monetary policy – such as the gratifyingly rapid economic recovery from the Corona pandemic, expansionary fiscal policy in the U.S., lockdowns in China and now the war in Ukraine instigated by the Russian president. What cannot be dismissed, however, is that such extraordinary events are more likely to lead to stubbornly high inflation in an environment of low interest rates and securities purchases. With economic recovery stalled in many countries and high inflation rates, the ECB now faces the balancing act of curbing inflationary pressures without further worsening the economic situation. In addition, the euro member states are not affected by war and inflationary pressure to the same extent. Germany, for example, could be more affected economically than France or the Netherlands. All the more reason, therefore, for Germany and the euro zone as a whole to increase the productivity of the economy by investing in the future. In the medium term, this would be one of the best ways to counter low interest rates and inflation risks.

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Basic income – an interesting idea, but its macroeconomic impact is still largely unknown

The idea of an unconditional basic income has gained renewed momentum since the outbreak of the corona pandemic. It is quite possible that various forms of unconditional transfers will become a reality more often than was thought before the pandemic. However, truly unconditional and living wage basic incomes, as they are often discussed, are unlikely and probably also not goal-oriented. Above all, too little is known about the macroeconomic effects of an unconditional basic income and the risks involved.

During the corona pandemic, transfer payments with few and simple conditions were adopted in various countries in order to be able to distribute funds to people quickly and without bureaucracy. Such low-condition transfer payments are similar to an unconditional basic income, but are tied to certain conditions – such as the amount of income or the way it is used – and are usually insufficient in amount to cover living expenses.  The best-known example is the total of $3200 that low- and middle-income individuals in the United States have received in three installments since March 2020. 

It has been argued in various quarters that such low-condition transfer payments or even an unconditional basic income could also play a more important role in the future – for example, to cushion the consequences of technological change. Job profiles are changing, partly because the pandemic is currently acting as a kind of catalyst, accelerating technological and social change. Forms of home-based work, digital education, or telemedicine will remain in part even after the pandemic hopefully subsides permanently. In addition, there are repeated warnings that robots or artificial intelligence could take more and more work away from people and cause higher unemployment among some population groups, at least temporarily. 

Structural change as a challenge for people

Such structural change is a challenge for people and the welfare state. Existing knowledge and skills acquired in the past may be rapidly devalued. To be sure, as with past technological changes, many new jobs will probably be created, which should more than compensate for the loss of other jobs.  However, at least temporarily, unemployment may rise in some sectors and social tensions may arise in society. In addition, flexible forms of employment such as on-call work and project-based work are on the rise. For these forms of employment, however, social security is usually worse than for permanent employees.

It is therefore important that social systems are restructured not so much with a view to possible job losses due to automation, but above all with a view to structural change that alters job profiles. In a broader sense, a social system is part of a country’s infrastructure and should be continuously renewed. Low-condition transfers could be an instrument for this and mean not only economic security but also more freedom for people. For example, by enabling them to pursue further education more flexibly. The individualization of life circumstances could be another reason for more low-condition transfers. People are increasingly taking time off from work or part-time work in very different ways in order to do unpaid work in the form of childcare or caring for relatives.

Unconditional basic income unlikely in the near future

These different work and life models make it difficult to adapt conventional social benefits to individual needs. Forms of unconditional transfers have several advantages because they quickly and easily reach many of the people who need them. However, it is unlikely that countries will introduce comprehensive and living wage forms of basic income. A rapid and radical transformation of social security systems would be too complex and risky. Ambitious ideas for an unconditional basic income – such as the 2016 popular initiative in Switzerland – have repeatedly failed because they would have led to drastic changes in the welfare state and society that were difficult for people to assess. In particular, questions of financing and incentives to work were not clarified convincingly enough. Most importantly, it is also largely unknown what the macroeconomic effects of an unconditional basic income would be. It is conceivable that unintended side effects could occur. For example, aid payments in the U.S. have – quite intentionally – stimulated aggregate demand. At the same time, however, inflation has probably also risen significantly as a result of these aid payments, which is now prompting the U.S. Federal Reserve to become much more restrictive in its monetary policy than was recently expected.

It is quite possible, however, that more and more forms of low-condition transfers will emerge. For example, low-condition support for training could become more popular, since in a world with uncertain future and employment prospects, investment in training is associated with high uncertainty and existing skills could quickly lose their value. For example, it could be determined that each person can draw a certain amount that covers continuing education costs. It is also conceivable that people with low incomes could receive a certain amount without conditions, for which they would not have to account. Higher levels of support would still be conditional.

Be open to experimentation

At present, there is still too often a belief that changes in the welfare state do not even need to be discussed in detail. This is dangerous. It is possible that our working world will not change as much as we think, but we should be better prepared for possible developments in the future. We should discuss it more. However, because of the unclear macroeconomic effects, it is better to experiment with limited low-condition transfers at the local level.

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Inflation expectations still firmly anchored in the United States and the euro area?

The sharp rise in inflation in 2021 in many advanced economies was not anticipated to this extent by many households, professional economic analysts, or financial market participants. Whether this unexpected rise in inflation will translate into higher inflation rates in the coming years depends to a large extent on long-term inflation expectations. These have increased in the United States and the euro area, for example, in the course of 2021 and to some extent also following Russia’s invasion of Ukraine, but at least for the time being remain at levels that do not suggest any significant deviations from the two percent inflation targets in the United States and the euro area. In the U.S., for example, professional economic analysts’ expectations for annual inflation over the next ten years increased from 2.2% since the beginning of 2021 to 2.5% at the beginning of 2022 (figure), but did not indicate any significant increase in long-term inflation expectations; this is also reflected in the fact that between 2002 and 2021, the average of these expectations was 2.3%. It should be noted that here we are looking at the consumer price index published by the Bureau of Labor Statistics, which is more widely followed by the American public. For its average inflation target of two percent, the U.S. Federal Reserve prefers to observe the personal consumption expenditures index published by the Bureau of Economic Analysis, which usually indicates a lower inflation rate by about 0.3-0.6%.

Also, shortly before the start of the war in Ukraine, households surveyed in the University of Michigan’s consumer sentiment surveys still expected inflation to be 0.3 percentage point higher annually over the next five years than it was at the beginning of 2021. It should be noted that the inflation rates expected by households at the level usually overestimate actual inflation and in the past were also usually about half a percentage point higher than the expectations of professional economic analysts.

In addition to surveying professional economic analysts and households, another option is to look at securities-derived inflation expectations of financial market participants to identify changing long-term inflation expectations. One advantage of this approach is that these expectations respond without lags in each case and can be assumed to reflect the expectations of profit-oriented financial market participants. A significant drawback, however, is that in the past they have often turned out to be very volatile and usually somewhat too high compared with actual inflation, and they are also of limited use in identifying changes in inflation expectations among the population at large. It is noteworthy that in the U.S.A., inflation expected by financial markets increased only from 2.0% to 2.3% during 2021. Since Russia’s invasion of Ukraine, however, these expectations have become more volatile, fluctuating between 2.1 and 2.4%.

Similarly, for the euro area, it is possible to check whether long-term expectations are significantly above the European Central Bank’s two percent target. For example, according to the Survey of Monetary Analysts, inflation expectations are stable at two percent from2024 to 2028. In the Survey of Professional Forecasters, which is also conducted by the ECB, respondents also expect an average annual inflation rate of 2.0% until 2026. However, there is still a probability of around 20% that inflation will exceed 2.5% in this five-year period. By contrast, the probability that the inflation rate will be between 1.5% and 2.4% is estimated at just over 50%. After all, according to this survey, the probability of a long-term inflation rate of below 1.5% is just under 30%. On the financial markets, too, somewhat higher inflation rates are now expected for the euro area in the long term. In addition, surveys of households in Germany, for example, have revealed a slight increase in long-term inflation expectations since the end of 2021.

All in all, it can be seen that, although long-term inflation expectations have risen in the euro area as well, they are still within a range that is compatible with the inflation target. Although long-term inflation rates in the two major economic areas of the U.S. and the euro area are thus still within a largely unproblematic range, the increases since 2021, some of which have been noticeable, show that the expectations of the various economic players are nevertheless adapting to the current high inflation rates. For this reason, too, it seems crucial that central banks in advanced economies identify further inflation risks more clearly than they did last year, especially in view of the war in Ukraine and the sanctions against Russia.

Sources: University of Michigan, Consumer Sentiment Survey; Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters; Federal Reserve Bank of St. Louis market-based inflation compensation using nominal and indexed Treasury securities.

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World economy shocked by the war in Ukraine

The global economy is being hit hard by Russia’s invasion of Ukraine and the resulting surge in energy prices. In the economies of Europe – particularly in Central and Eastern Europe – economic development is being particularly affected due to geographical proximity and high dependence on Russian natural gas. But the economic impact of the war is also being felt in other regions of the world. For example, the war and sanctions against Russia are increasing the already existing bottlenecks in global supply chains. Ukraine and Russia are major suppliers of various raw materials needed for key production steps. This is likely to lead to production delays around the world in the coming months and push inflation up further. Food prices will also remain significantly elevated due to fears of reduced exports of grains or raw materials for fertilizers from Ukraine and Russia.

My forecast is based on the assumption that the war between Russia and Ukraine will continue for several weeks and months and that the sanctions will remain in place for the longer term. Political and economic developments in Russia and the region as a whole will remain a source of heightened uncertainty over the forecast period, dampening global economic development. Globally, inflation will remain high for the time being in view of the sharp rise in raw material prices. At least the Corona pandemic subsided, at least temporarily, in spring 2022. With the exception of China, measures to contain the pandemic have been largely lifted in most countries. However, the continuation of the recovery of the global economy from the effects of the pandemic is now being slowed by the Ukraine war and its economic consequences.

Final quarter of 2021 in Europe dominated by the corona pandemic

In the fourth quarter of 2021, economic activity in the advanced economies was heterogeneous. In the euro zone, economic activity cooled significantly as a result of a new wave of the pandemic, with the growth rate only o.3 percent compared with the previous quarter. The course of economic activity varied from country to country and was largely shaped by the timing and strength of corona waves and the measures taken to contain them in each case. However, the imposed or voluntary restrictions on social contact and economic activity were significantly lower than in previous pandemic waves. By contrast, overall economic output in the USA expanded strongly, with growth of 1.7% compared with the previous quarter. However, this significant growth was also due to a sharp increase in inventories. Following very low inventories in the summer, many companies apparently tried to replenish their stocks as best they could out of concern about continuing supply bottlenecks, but this is likely to have exacerbated existing supply chain problems in the short term. In Japan, too, GDP expanded by a strong 1.1% in the final quarter of 2021. The Japanese economy benefited above all from a return to significantly higher consumer spending and dynamic exports.

In many emerging countries, the economy grew only moderately in the fourth quarter of 2021. In various emerging countries, particularly Turkey, Brazil and – to a lesser extent – Russia, high inflation rates and economic policy measures to reduce them were the main factors slowing economic growth. In India, too, the economic recovery continued at a much slower pace. In China, the economy grew by 1.6 percent despite the smoldering debt problems in the real estate sector, even if the increase remained moderate compared with the pre-pandemic trend rates. Private consumption and exports in particular drove growth, while investment was unusually subdued for China.

Global trade in goods, which had recovered rapidly from the pandemic-related slump and had already exceeded pre-crisis levels by spring 2021, developed dynamically, rising by 2.5% in the fourth quarter compared with the previous quarter. year-on-year growth was 6.4%. The marked upturn in international merchandise trade was due not least to the fact that demand shifted from personal services, where consumption was reduced as a result of the pandemic, to tradable goods. The consumption structure is now expected to return to normal. Strong growth in world trade – driven in particular by strong demand in the United States – has contributed significantly to bottlenecks in international supply chains. The significant growth in demand meant that maritime transport capacity – be it ship capacity, container availability or handling capacity at ports -2021 was barely able to cope with additional volumes.

Exploding commodity prices and renewed supply bottlenecks lead to rising inflation

Russia’s invasion of Ukraine caused many prices for raw materials and agricultural products to explode. Brent crude oil rose in price from around $80 per barrel at the beginning of the year to over $120 at the beginning of March. European natural gas prices doubled in the same period, having already risen by a factor of four in the course of the previous year. Significant price increases were also seen for industrial raw materials and foodstuffs. Shortages of key raw materials and production losses in Ukraine are exacerbating the already existing problems in international supply chains. For example, further delays are expected in semiconductor production, leading to bottlenecks in the automotive industry in particular. While there were signs of a gradual easing of supply chain problems at the beginning of the year, Russia’s invasion of Ukraine is likely to exacerbate the bottlenecks again. Russia and Ukraine are also major grain growing countries. The war has significantly increased uncertainties as to whether farmers in the two countries will be able to regain the crop volumes of previous years and export them. As a result, grain prices have also skyrocketed. Concerns about food shortages have increased significantly, particularly in some emerging countries.

Against this background, producer prices in the manufacturing sector have once again increased significantly, having already risen sharply since spring 2021. In the USA and the euro zone they were around 9.8% and 11.7% higher respectively in January than a year earlier. Consumer price inflation also picked up again, having already risen sharply in many places during 2021. In the United States, inflation – which there was also fueled by noticeable fiscal stimulus in 2021 in addition to high raw material prices and price increases due to supply bottlenecks – climbed to 7.9% in February. Inflation in the euro zone also increased significantly to 5.8% most recently.

Compared with the previous year, most of the price increase was due in particular to the dramatically higher oil price. However, core inflation (inflation excluding energy and food prices) was also noticeably higher in February, particularly in the USA. In the United States, it was 6.4% year-on-year in February; in the euro zone, 2.7%. Inflation is not expected to fall rapidly; in fact, it is likely to rise in the course of the spring before rates are expected to decline gradually in view of weakening raw material prices and weakening economic momentum. The current supply bottlenecks should also be gradually overcome in the course of the year.

Difficult balancing act for monetary and fiscal policy

In view of high inflation and the gloomy economic outlook, central banks are faced with a dilemma similar to that previously encountered in the wake of the two oil price shocks in 1973 and 1979. The economic outlook, which was still quite favorable at the beginning of the year before the war in Ukraine, led central banks in most advanced economies to hold out the prospect of gradually less expansionary monetary policy for the current year in view of higher inflation. Central banks in the United Kingdom and South Korea have already decided to raise key interest rates for the first time in 2021. Central banks in Norway and various countries in Central and Eastern Europe have also taken their first interest rate steps in 2021. The U.S. Federal Reserve has now raised its key interest rates by a quarter of a percentage point for the first time since December 2018, following the outbreak of war in March 2022, and has also announced that it intends to begin the process of gradually reducing its balance sheet from the summer. The European Central Bank has also already taken a slightly less expansionary course. It phased out its securities purchases under the emergency purchase program launched at the start of the pandemic in March. At the same time, it temporarily increased its general securities purchase program to EUR 40 billion per month, but is expected to phase this out next summer. An increase in key interest rates is expected towards the end of the current year. However, inflation in both the USA and the euro zone is not expected to fall gradually toward the central banks’ two percent target until 2023.

In Japan, inflationary pressures have also become somewhat higher, but they remain low compared with other advanced economies, so monetary policy is not expected to tighten until towards the end of the forecast period. In various emerging economies, such as Turkey, Brazil and Russia, inflation rates have skyrocketed, in some cases dramatically, and key interest rates have already been raised significantly.

After governments had mitigated the economic consequences of the pandemic and the measures taken to combat it by means of expansive fiscal policies in the advanced economies – and to a lesser extent also in many emerging economies – in 2020 and 2021 through extensive additional spending and tax deferrals, no new economic stimulus measures are expected in this respect in the current year. However, in view of the war and higher energy and food prices, measures are likely to be taken in various countries to mitigate the impact on low- and middle-income households, for example. Several countries are also likely to see higher defense spending and accelerated energy restructuring in the medium term, which should result in deficits remaining elevated in many advanced economies.

In emerging economies, budget deficits, which have risen sharply since the pandemic, are being reduced only slowly despite the gradual economic recovery, although longer-term spending programs have often been put in place, as in advanced economies, aimed primarily at strengthening infrastructure.

Outlook: Slowdown in recovery accompanied by high inflation

The war in Ukraine and the extensive sanctions against Russia have noticeably clouded the global economic outlook. While household purchasing power is being reduced by high energy prices, high geopolitical uncertainty is likely to reduce companies’ propensity to invest. In addition, continuing supply chain problems will repeatedly lead to production delays in industry. The economy will therefore only grow slightly or stagnate in many places in the first half of 2022.

By contrast, positive impetus will come from the recovery as a result of the lifting of pandemic-related restrictions on social life. Most existing restrictions will be lifted or replaced by less far-reaching requirements by the start of the second quarter. Individual behavioral adjustments to avoid infection will also be significantly lower. In emerging markets, where vaccination campaigns to date may have used less effective vaccines, somewhat slower success in pandemic control can be expected. But even there, the remaining restrictions are likely to only marginally limit economic activity. China, on the other hand, is likely to continue to adhere to a much stronger containment policy than other countries, which is likely to repeatedly lead to the sealing off of entire cities and closures of factories or port facilities. This will help keep problems with international supply chains high through at least the first half of 2022.

During 2022, the problems are likely to gradually dissipate. Energy and commodity prices are also expected to gradually decline again from the summer onward, reducing inflationary pressures. Against this background, I expect the global economy to grow by only around three percent this year. In 2023, economic output is then expected to grow more strongly again by slightly more than four percent.

Risks

The greatest uncertainty factor for the economy lies in the further course of the war in Ukraine. For example, there could be a further escalation of the conflict, resulting in further sanctions or restrictions on oil and gas supplies from Russia. Economic development in the world and in Europe in particular would be further affected by this. However, an easing of the conflict – for example in the form of a ceasefire – is also conceivable, which would probably lead to an upturn in global economic development. However, the risk of geopolitical crises or even armed conflicts is also heightened in other regions of the world. In Asia, for example, geopolitical crises continue to smolder around Taiwan and the Korean peninsula.

With vaccination progress and the now dominant Omicron virus variant, which is usually associated with milder disease courses than other variants, the downside risks related to new pandemic waves have recently been reduced. However, new virus variants could lead to further waves of infection and, in particular, require the reintroduction of infection control measures if existing vaccines lose their effectiveness. Another negative risk for the economy is the longer than assumed persistence of problems in international supply chains, which would slow down the economic recovery and further increase inflation risks. Above all, there is the risk in this context of even more numerous than assumed factory or port closures in China in the course of pandemic control measures.  In addition, it is possible that the smoldering real estate crisis in China could worsen and spill over to the rest of the Chinese economy and other countries. Since Chinese real estate companies are highly leveraged and have high foreign borrowings, an increase in U.S. policy rates, for example, could worsen the situation. A real estate and financial crisis in China, given its relatively low financial linkages with the rest of the world, would probably not turn into a global financial crisis, but given the size of the Chinese economy, it would have a significant impact on the rest of the world through its goods markets. Other emerging and developing economies also face the risk that an increase in interest rates in the U.S. will lead to capital outflows. In the context of China, it is also important to mention the high level of political tension with the United States. The American need to limit China’s economic expansion and the associated increase in its international political influence has continued under the new American administration. In this environment, the risk of a renewed flare-up of the trade and economic conflict between the two great powers remains high, especially against the background of Western sanctions against Russia, which the Chinese government has so far not supported.

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Further wave of pandemic delays recovery of the global economy

The global economy lost momentum at the end of last year. In the euro zone in particular, a renewed wave of pandemic and bottlenecks in international supply chains caused the economy to slow down in the final quarter of 2021; the growth rate in the euro zone was just 0.3 percent compared with the previous quarter, following a strong 2.3 percent in the third quarter. In other major economies – particularly the United States – the economy still grew at higher rates in the fourth quarter. In the USA, however, the significant growth of 1.7 percent was also due to a sharp increase in inventories. After very low inventories in the summer, many companies apparently tried to replenish their stocks as best they could out of concern about continuing supply bottlenecks. In the emerging markets, too, the economy probably developed somewhat less dynamically in the fourth quarter of 2021, but in many places it was still solid. In China, for example, the economy grew by 1.6 percent despite the smoldering debt problems in the real estate sector. Growth was driven primarily by private consumption and exports, while investment was subdued, which is unusual for China. In India, too, the economy probably continued its recovery process in the fourth quarter of 2021. However, in other emerging markets – particularly Turkey and Brazil – growing inflation rates and economic policy measures to reduce them in particular are likely to have significantly dampened economic growth.

Against the backdrop of the omicron wave and continuing problems with international supply chains, the global economy lost further momentum at the beginning of the year. In addition, particularly in Europe, economic activity is being weighed down by the high level of uncertainty surrounding the further course of the Russia-Ukraine conflict. In the advanced economies, the pandemic in January probably dampened private consumption significantly through restrictions or voluntary behavioral adjustments. In February, however, there are now signs of a gradual easing of the pandemic situation in several countries. However, economic development is being hampered above all by the numerous work stoppages caused by isolation or quarantine, which could lead to interruptions in production or the transport of goods. Against this background, gross domestic product in many advanced countries is likely to increase only slightly in the first months of this year.

But in China, too, the economy continues to be severely impacted by the pandemic. The Chinese government is still taking particularly rigorous measures – such as sealing off entire cities – to contain the corona pandemic. One of the consequences of this is that temporary closures of production facilities or ports, for example, are repeatedly occurring, which is also delaying a normalization of international supply chains. Other countries are differently well prepared for the omicron wave. In India, Russia and Mexico, for example, only slightly more than half of the population has been vaccinated against the coronavirus. Vaccination rates in Central Eastern European countries are also mostly below those of other European countries. In addition, booster vaccinations are often less advanced in Central Eastern Europe.

Economic recovery continues in spring

With the onset of spring, the global economic recovery will gain more momentum. This forecast is based on the assumption that the ongoing pandemic wave in most advanced economies will gradually subside in the course of the spring and that the immunization of the population acquired through vaccination or surviving illness will prevent a strong resurgence of the pandemic. Most existing restrictions on social life will be lifted or replaced by less far-reaching requirements by the beginning of the second quarter. Individual behavioral adjustments to avoid infection will also be much lower, which will spur private consumption In less advanced economies, where vaccination campaigns to date may have used less effective vaccines, somewhat slower success in pandemic control is expected. This forecast also assumes that China will adhere to a much stronger containment policy than other countries. This will contribute to only a gradual reduction in international supply chain problems over the course of the first half of 2022.

Against this background, gross domestic product in the advanced economies will start to grow again at slightly higher rates from the second quarter. In the United States, however, the stimulus effect of the fiscal stimulus adopted in December 2020 and March 2021 is slowly running out, which will dampen private consumption and goods imports. In addition, high inflation – averaging 4.7 percent in 2021 – is reducing household purchasing power. In view of the rise in inflation, the U.S. Federal Reserve announced that it would phase out its securities purchase program in March and raise its key interest rates. Further hikes are likely to follow later this year. However, inflation will also gradually decline as fiscal stimulus is phased out and global supply chains gradually normalize. But inflation will still be somewhat higher in 2023 than in the years before the pandemic. The days of very low inflation are likely to be over, at least for the time being. The economies of Japan and the United Kingdom will also start to grow more strongly again from the second quarter. In Japan, further fiscal stimulus measures were adopted in November, providing an additional boost to domestic demand. In the United Kingdom, the further recovery is still being hampered by the consequences of Brexit and unresolved issues relating to the status of Northern Ireland.

Further recovery also in the euro area

Likewise, a noticeable economic recovery is foreseeable in the euro zone from the second quarter. Catch-up effects and the good situation on the labor market in many countries will support private consumption. In many euro area countries, for example, consumer confidence has declined only moderately despite the omicron wave. In addition, tourism will pick up noticeably again toward the summer, generating revenue for various European vacation destinations. The extensive reconstruction aid provided under the European Reconstruction and Resilience Facility will probably have only a minor effect on the economy in the short term, but will probably boost investment noticeably in the medium term. In addition, it currently looks as if the European Central Bank will continue to pursue its loose monetary policy and only gradually make it less expansive. Although it will probably phase out its securities purchases under the emergency purchase program launched at the start of the pandemic in March, it will probably temporarily increase its general securities purchase program at the same time and then gradually reduce it over the course of the year. An increase in key interest rates is not yet expected in 2022. Inflation in the euro zone, which rose to 5.1 percent in January in the face of higher energy prices – it averaged 2.7 percent in 2021 – will probably ease gradually in the course of this year; however, a rapid decline to the central bank’s two percent target is not expected for the time being.

In Central and Eastern Europe, too, economic momentum will pick up again in the spring. In the manufacturing sector, order books are well filled and purchasing managers’ indices were well above the expansion threshold at the beginning of January 2022, so as the pandemic subsides and the supply problem gradually resolves, production in the region should pick up significantly. Fiscal stimulus could also come from allocations from the European Recovery Fund over the forecast period.

In the emerging markets, the omicron wave is likely to dampen further economic recovery for somewhat longer than in the advanced economies. In China, further economic momentum will also be held back by country-specific factors. Above all, piled-up debts, especially in the real estate sector, are a drag on the Chinese economy. At least the government seems to have succeeded so far in preventing a major crisis, which would probably also have a major impact on the financial sector and the rest of the economy. In addition to the pandemic, various other emerging markets such as Turkey and Brazil are also struggling with a significant rise in inflation, which is severely dampening people’s purchasing power and growth prospects. Uncertainties regarding the further course of the Russia-Ukraine conflict and possible Western sanctions are weighing on the Russian economy. For example, the ruble has depreciated further against the US dollar and the euro, especially since the beginning of 2022. At least export revenues have increased due to the rise in oil prices and are easing the burden on the federal budget.

From the fourth quarter of 2022, the global economic upswing will lose some momentum and most advanced economies will gradually regain or exceed their long-term growth path. Economic output will also continue to grow solidly in China and most other emerging economies; however, in China in particular, growth rates are likely to be significantly lower than in the decade before the pandemic in view of the simmering problems in the real estate sector and a labor force that is no longer growing.

Downside risks dominate

Overall, I expect the global economy to grow by 4.3 percent this year. Next year, the global economy is expected to grow by 3.5 percent. As vaccination progresses, the downside risks relating to new pandemic waves have recently diminished, but remain elevated. For other reasons, too, the forecast as a whole remains predominantly subject to negative risks. In particular, there is a further risk that problems in international supply chains will persist longer than assumed, which would slow down the economic recovery and increase inflation risks. In particular, there is the risk of prolonged factory or port closures in China, and it is possible that the smoldering real estate crisis in China could worsen and spill over to the rest of the Chinese economy and other countries. Since Chinese real estate companies are highly leveraged and have high foreign borrowings, an increase in U.S. policy rates, for example, could worsen the situation. In other emerging and developing economies, there is a risk that pandemic-related economic dislocations and increases in private or public debt could lead to debt crises. In addition, the risk of geopolitical crises or even armed conflict has increased in some regions of the world. In particular, there is a possibility that Russia will attempt to annex parts of Ukraine, which would probably result in greater geopolitical tensions and, not least, a rise in oil and gas prices. In Asia, geopolitical crises continue to simmer around Taiwan and the Korean peninsula.

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One year of Joe Biden as US President: U.S. economy at least one step ahead of euro area

One year has now passed since Joe Biden was inaugurated as US President. He has been able to achieve some of his economic policy goals during this time – such as passing the major aid and stimulus package in March 2021 or getting Congress to approve infrastructure renewal in November. But recently, Joe Biden has also had to take a lot of economic criticism – some blame his expansionary fiscal policy for higher inflation, for example.

Yet there are also positive sides to the strong fiscal stimulus. For example, in contrast to the euro area, the U.S. economy has already returned to the pre-crisis level of economic output seen at the end of 2019 by early summer 2021. One important reason for this is probably the extremely expansionary fiscal policy during the pandemic. In total, three fiscal packages amounting to about 15 percent of U.S. gross domestic product were passed in 2020 and 2021 under Presidents Trump and Biden. These fiscal packages have stimulated private consumption, which already returned to pre-crisis levels by early 2021. But investment has also developed much better in the USA than in the euro area. The subdued investment trend in the euro area is likely to put the brakes on further recovery, especially as companies were already investing more cautiously than in the United States before the pandemic. At least there is reason to hope that the “Next Generation EU” fund will boost investment in the euro area in the coming years.

On the US labor market, these developments have been reflected in significant and rapid improvements. Admittedly, there are still far fewer jobs than before the pandemic because, for example, many people have to look after their children or relatives in need of care at home and have not yet returned to the labor market. But overall, the situation has nevertheless improved much faster than many had expected even as recently as spring 2021. Wages also grew more strongly than in the 2010s.

However, higher inflation has recently eaten up the nominal wage increases again. Although inflation – at an annual rate of 7.0 percent in December – is now expected to ease gradually, also in view of the expiry of the fiscal stimulus, it is likely to remain high this year. For example, the price-driving problems in international supply chains will not disappear any time soon in view of the omicron wave.

In principle, there is no need to fear somewhat higher inflation than in the years before the pandemic. It can be a positive sign of a dynamic economy in which low- and middle-income people also participate via higher wage increases. Nevertheless, there is a risk that inflation will remain long and well above the Fed’s average two percent target and can only be controlled with strong monetary tightening.

The comparatively favorable development of the U.S. economy despite continuing problems is not an isolated case. It has already proved resilient in the past and, for example, grew more strongly than in the euro area after the financial crisis until the start of the pandemic. In the United States, the economy grew by more than a quarter in real terms from 2009 to 2019, compared with only around 15 percent in the euro area. Even Donald Trump’s unpredictable and confrontational leadership has not led to the economic crash that has occasionally been predicted.

To be sure, it is quite possible that the euro area economy will grow more strongly than the U.S. economy in 2022. But this is mainly due to the fact that the US economy is at least one step ahead of the euro area in recovering from the pandemic. For the coming years, the United States has a good chance of leaving many economies in the euro area behind, despite the ongoing domestic political polarization.

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