The additional downside risks to global growth
The June edition of “Global Economic Prospects” published by the World Bank projects global growth to slow sharply from 5.7 percent in 2021 to 2.9 percent this year. The effects of the invasion account for most of the 1.2 percentage point downward revision to this year’s global growth forecast. Growth in emerging market and developing economies (EMDEs) is expected to slow from 6.6 percent in 2021 to 3.4 percent in 2022 due to negative spillovers from the war in Ukraine and a deteriorating global environment. Against this background, Justin Damien Guénette argues that there are various overlapping and mutually reinforcing downside risks, including intensifying geopolitical tensions, rising financial instability, and continuing supply strains. These are:
- Central banks in advanced countries have increased interest rates and are expected to continue to do so as they are fighting inflationary pressures. As a result, EMDE financial conditions have reached their tightest level since the start of the pandemic, pointing towards rising financial stress.
- Further major disruptions to energy markets centered around Europe, could lead to spikes in the prices of natural gas, oil, and coal, leading to sharply lower growth in advanced economies and particularly in the euro area.
- Large-scale COVID-19 resurgences in China which follows such strict lockdown rules, would trigger intermittent lockdowns all the way through 2023, reducing growth in China by 0.5 percentage point in 2022 and a further 0.3 percentage point in 2023.
- The simultaneous materialization of all three scenarios presented above could reduce global growth to only 2.1 percent in 2022 and 1.5 percent in 2023—0.8 and 1.5 percentage points slower than in the baseline forecast
How sharp will be the global slowdown?
By: Justin Damien Guénette – Brookings
The situation in the U.S. and Europe
In this commentary, Menzie Chinn wonders whether there has ever been a recession in Europe without a recession in the US. He finds that there have been two European recessions not coincident with US recessions: in the early 1990’s in what was to become the Euro area, and another recession in the Euro area in 2011-12.
He concludes by finding that over the period 1995-2019, the correlation of Q/Q growth rates is about 0.28: a one percentage change in US growth is associated with a 0.54 percentage point change in Euro area growth. It’s therefore possible for Q/Q growth to diverge between the U.S. and Europe.
Recession Talk: US and Euro Area
By: Menzie Chinn – University of Wisconsin
