These are the two scenarios for the global economy envisaged by MAPFRE Economics
Uncertainty has been the only certainty in recent years, as evidenced by the pandemic, inflation, the war in Ukraine, and most recently the banking crisis. MAPFRE Economics, MAPFRE’s research arm, always envisages two different scenarios in its forecasts in order to adapt to economic developments in the subsequent months.
On the one hand, it performs a more positive analysis under a baseline scenario, revising its growth estimates for the global economy upwards to 2.8% this year and 3% the following year while maintaining average inflation for 2023 and 2024 at 7% and 4.9%, respectively. However, it also puts forward a stressed scenario that is more pessimistic in nature and in which it anticipates global economic growth of 2% and 2.3% in 2023 and 2024 and average inflation of around 7.4% and 5.4%, respectively.
The baseline scenario envisaged in this report sees a wide-ranging pick-up in economic activity leading to higher GDP growth forecasts in 2023 and, to a lesser extent, in 2024. At the same time, the scenario foresees inflation continuing to slow at an appropriate pace in 2023 and more sharply in 2024 to approach the central banks’ target range.
This economic growth momentum is underpinned by several elements, including weaker-than-expected growth in the Eurozone, which manages to avoid recession on an annual basis; positive dynamics in the United States extending into at least the first half of the year; and China gaining traction, as its reopening process consolidates a return to potential growth.
Emerging economies suffer less deterioration in the face of benign external demand. “The downside of this upturn lies in the anticipation of weaker activity in the run-up to 2024. This is the result of monetary policy effects becoming more acute starting in the second half of 2023 onwards, while confidence channels deteriorate along with access to credit,” the study notes.
The baseline scenario therefore describes a path of gradually declining dynamism starting in the second half of the year, where higher growth than previously anticipated remains insufficient to reach potential growth.
MAPFRE Economics expects fiscal policy to continue to become less relevant as it reaches neutral territory, albeit with still high deficits over the entire projection horizon. With regard to monetary policy, terminal rates should peak in May and July 2023, with the US Federal Reserve hiking rates by 25 basis points and the ECB by 50. These increases will be followed by a longer pause under a positive real interest rate environment (until the last quarter of 2023 and the first quarter of 2024), after which a staircase-like decline towards the natural rate is expected.
On the geopolitical front, the war in Ukraine and sanctions on Russia are sustained over the entire projection horizon — one of the catalysts in the risk-stressed scenario — as well as the trend toward multipolarity, increased fragmentation, and reduced dynamism of global trade. Consequently, MAPFRE Economic Research expects the oil price to sit above its current level for this year and next, at around $85, while gas is expected to behave more benignly despite being subject to greater volatility.
The alternative or stressed scenario, which is also the least likely of the two, projects a growth path that diverges from the baseline scenario. “The catalyst for this is a resurgence of short-term inflation, driven by a new supply-demand imbalance that is more protracted than anticipated and is sufficient to lead to a more punishing and previously unforeseen tightening of financial conditions, which will persist through 2023 and part of 2024,” the report explains.
As a result, the credit cycle “will begin contracting, provoking a correction in the price of risky assets and an acceleration of the transition to an environment of falling economic activity.”
As a consequence of the resurgence of short-term inflation, monetary policy at the main central banks will raise the range of terminal rates more aggressively — by around 100 basis points — while accelerating the pace of balance sheet reduction to prevent a change in inflation expectations. Fiscal policy, for its part, will remain benign and will not reprise its role of dampening previous shocks, thus avoiding fiscal dominance actions that exacerbate the change in financial conditions.
In turn, MAPFRE Economics points out that this will cause equity markets to retreat by more than 15%, interest rate curves to deepen, credit spreads to widen, and real estate markets to correct by more than 10%. On the currency front, the US dollar is expected to regain strength against other currencies (although its exchange rate remains above parity against the euro). This trend will be more abrupt with emerging currencies, especially those with structural vulnerabilities.
Lastly, in terms of economic activity, the second-order effects of the shock in the stressed scenario erode both the balance sheets of economic agents and their purchasing power. As the latter undergoes deeper deterioration, weakening demand will exacerbate the effects of the lagged monetary policy and leave a longer and lasting impact by spilling over into consumption and credit for part of 2024.
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