Consumer Durables News

A global recession can be avoided, but risks are high

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World real GDP likely declined in the second quarter of
2022, but this expected outcome is not inevitably the beginning of
a global recession.

Entering 2022, the global economy was headed for a major
slowdown. As inflation raged, central banks accelerated the pace of
monetary policy tightening, aiming to slow the growth of aggregate
demand and calm price pressures. Two shocks intervened—Russia’s
invasion of Ukraine on 24 February and lockdowns in mainland China
in response to a March-April surge in COVID-19 cases. These shocks
further disrupted supply chains, adding to cost pressures. At the
same time, soaring energy and food prices eroded consumer
purchasing power and sentiment. After growing at annual rates of
6.0% quarter on quarter (q/q) in the fourth quarter of 2021 and
3.5% in the first quarter of 2022, world real GDP fell an estimated
1.7% in the second quarter. Among the major economies in decline
were the United States, eurozone, United Kingdom, mainland China,
Taiwan, Russia, Poland, Turkey, and South Africa.

Global GDP flash data

What’s ahead? A period of subpar global growth is the
most likely outcome.

Absent new shocks, the global economy is projected to resume
growth, albeit at a tepid annual pace of under 2.0% q/q in the
third and fourth quarters of 2022. Mainland China is reopening
after lockdowns and Asia Pacific’s emerging markets are achieving
solid growth even as European and US economies struggle. Worldwide,
the transition from pandemic to endemic for COVID-19 is enabling
growth in travel, tourism, and other consumer service sectors that
were hit hard during the 2020 recession. In advanced countries,
household finances are generally in good shape, thanks to
accumulated savings and asset appreciation in 2020-21. In a cycle
dominated by consumer spending, households are positioned to drive
the global expansion forward.

After a 3.3% contraction in 2020 and a 5.8% rebound in
2021, global real GDP growth is projected to slow to 2.7% in 2022
and 2.6% in 2023.

This forecast is marked down by 0.2 percentage point in 2022 and
0.3 percentage point in 2023. The 2022 downgrade is attributable to
the US economy’s weaker first-half performance, while the 2023
downgrade reflects the widespread impacts of more restrictive
financial conditions. With the world’s population growing about
1.0% annually, our outlook implies solid gains in real per capita
GDP and thus avoidance of a global recession.

Rapidly tightening financial conditions pose a downside
risk to global growth.

In response to persistently high inflation and an upward drift
in long-run inflation expectations, central banks are accelerating
monetary policy tightening. While the 10-year US Treasury yield has
retreated from mid-June highs to around 3.0%, risk spreads have
widened, raising financing costs for businesses and households.
More emerging markets appear unable to raise new international
bonds at sustainable cost levels, forcing them to seek alternative
funding sources. Investors’ flight to safety would likely mean
continued strength in the US dollar and elevated risks for emerging
markets that depend on capital inflows to finance trade and fiscal
deficits.

Housing markets are especially vulnerable in the current
environment.

Low mortgage rates and increased mobility with the
work-from-home trend have fueled housing bubbles around the world.
Rising mortgage rates and inflated home prices have hurt
affordability, which reduced demand. The resulting market
corrections will have adverse consequences for household net worth,
residential construction, and consumer durables spending.
Nonresidential building construction is also sensitive to interest
rates and could see further declines in areas with high
vacancies.

With commodity prices falling, downstream inflation is
nearing an inflection point.

In response to rising interest rates, US dollar appreciation,
and recession fears, a broad retreat in industrial and agricultural
commodity prices is under way. The IHS Markit Materials Price Index
(MPI) fell 8.4% in the four weeks ended 15 July, led by declines in
prices of metals, chemicals, fibers, and rubber. The retreat in
commodity prices is filtering downstream, causing inflation in
prices of intermediate goods to slow globally. Evidence of
decelerating prices of finished goods will become more pervasive in
the final quarter of 2022. Global consumer price inflation is
projected to ease from 7.3% in 2022 to 4.2% in 2023 and 2.7% in
2024.

The US economy has stalled, but it is not in
recession—yet.

US real GDP declined at an annual rate of 1.6%
q/q in the first quarter, pulled down by a sharp rise in imports
and a decline in exports. We expect a similar contraction in the
second quarter, owing to a sharp reduction in inventory
accumulation. This episode is unlikely to meet the broad criteria
for a recession set by the National Bureau of Economic Research, as
it difficult to square the real GDP losses with notable gains in
employment, incomes, and personal consumption. Yet, the path
forward will be difficult. The Federal Reserve has signaled a
willingness to raise interest rates enough to slow inflation to its
2% target, even if the result is a recession. The boom in housing
markets is reversing, and businesses will likely rein in capital
spending and hiring plans. Real GDP growth is projected to slow
from 5.7% in 2021 to just 1.4% in 2022 and 1.3% in 2023 before
picking up to 1.9% in 2024. With real GDP growth running below
potential, the unemployment rate will rise from 3.6% in June to a
high of near 5.0% in 2024.

High energy costs are pushing Western Europe toward
recession.

Our July forecast already incorporates mild second-quarter
contractions in real GDP in the UK, Italy, Spain, and the
Netherlands. With inflation surprising on the upside, the central
banks are stepping up the pace of monetary policy tightening. While
a rebound in tourism and consumer services might give the region a
slight lift in the summer quarter, another setback is likely in the
fourth quarter given unreliable energy supplies. Exceptionally high
natural gas and electricity prices will damage industrial
competitiveness in Germany and other manufacturing centers. The
destructive Russia-Ukraine war will likely drag on through 2022,
deflating consumer and business confidence across Europe. Eurozone
real GDP growth is projected to slow from 5.4% in 2021 to 2.5% in
2022 and 1.2% in 2023 before improving to 2.0% in 2024.

Mainland China’s economy is tentatively recovering from
COVID-19 lockdowns.

Mainland China’s real GDP declined 2.6% q/q in
the second quarter, resulting in 0.4% year on year (y/y) in growth
that was supported by infrastructure spending and investment by
state-owned firms. Monthly data suggest a broadening recovery in
June. The government’s dynamic zero-COVID policy will remain in
place through at least March 2023, preventing a return to normalcy
and limiting the effectiveness of economic stimulus. The property
market remains in recession, and declining land sales are hurting
local government finances. Real GDP growth is projected to slow
from 8.1% in 2021 to 4.0% in 2022 before strengthening to 5.2% in
2023.

Asia Pacific will dominate global growth as other
regions falter.

Resilient growth in Asia Pacific is key to our outlook of
sustained global economic growth in 2022 and 2023. This region will
likely account for 53% of global real GDP growth in 2022 and an
exceptional 62% in 2023 (its contribution is projected to average
about 56% over the next decade). After slowing from 6.2% in 2021 to
3.9% in 2022, Asia Pacific’s real GDP growth is projected to settle
at 4.4% in both 2023 and 2024. India, Indonesia, Vietnam, and the
Philippines will likely achieve growth rates of 5-7%. This
performance reflects strong intraregional growth dynamics related
to regional free-trade agreements, efficient supply chains,
competitive costs, and steady inflows of foreign direct investment.
The region is also benefiting from strong pent-up demand for
semiconductors and autos. Parts of the region experienced later
waves of COVID-19 and are now experiencing robust recoveries
following the easing of pandemic restrictions.

Bottom line

While the global economy is expected to avert a
recession, business conditions will be increasingly difficult in
the year ahead as financial markets tighten. The risk of recession
remains high—in the 40-50% range in major economies. Our next
forecast will likely include downward revisions in interest
rate-sensitive sectors such as housing, consumer durables, and
business capital spending.




Posted 25 July 2022 by Sara Johnson, Executive Director – Economic Research, S&P Global Market Intelligence


This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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