Global growth prospects and revisions. Global growth is expected to slow from 3% in 2022 to 2¼% in 2023, well below the pace predicted before the war. In 2023, real global incomes could be about US$2.8 trillion lower than expected a year ago (a deficit of just over 2% of GDP on PPP basis).
Annual GDP growth is projected to slow sharply to ½% in the United States and ¼% in the euro area in 2023, with risks of production declines in various European economies during the winter months. Growth in China is expected to drop to 3.2% this year amid COVID-19 cuts and property market weakness, but policy support could help growth pick up in 2023.
Inflation has become broad-based in many economies. Tighter monetary policy and easing supply bottlenecks may ease inflation pressures next year, but rising energy prices and higher labor costs are likely to slow the pace of decline.
Headline inflation is expected to fall from 8.2% in 2022 to 6½ percent in G20 economies in 2023, and fall from 6.2% in G20 advanced economies this year to 4% in 2023.
There is significant uncertainty surrounding the predictions. More severe fuel shortages, especially for gas, could reduce growth in Europe by another 1¼ percentage points in 2023, while global growth could be reduced by ½ percentage points and European inflation could rise above 1½ percentage points.
Further interest rate increases are needed in most major economies to stabilize inflation expectations and ensure that inflation pressures are permanently reduced.
Financial support is needed to help soften the impact of high energy costs on households and companies. However, this should be temporary, focusing on the most vulnerable areas, maintaining incentives to reduce energy consumption, and withdrawing as pressures on energy prices ease.
Short-term fiscal actions to soften living standards must take into account the need to avoid further persistent stimulus and ensure fiscal sustainability in times of high inflation.
Paying the price of the war. Russia’s invasion of Ukraine hit the global economy. Global economic growth stalled in 2Q22, and indicators in many economies now point to a long period of slow growth.
The war has dramatically increased energy and food prices and exacerbated inflationary pressures at a time when the cost of living is skyrocketing around the world.
The fallout from war remains a threat to global food security, especially when combined with extreme weather events from climate change. International cooperation is needed to keep agricultural markets open, meet urgent needs, and strengthen supply.
The scale of the property damage in Ukraine is difficult to determine, but the economic impact of Russia’s bombs is much greater and wider than previously thought. The OECD estimates that global financial losses as a result of the war next year will be $2.8 trillion more than forecasts before the invasion of Russia.
From the OECD report; “We are paying the price for our support to Ukraine. But the price we pay is counted in dollars, euros and pounds, while Ukrainians pay with their lives. If Russia and other authoritarian regimes believe they can invade their neighbors and break international law with impunity, we will all pay a much higher price. We have a moral responsibility to support this independent democracy in the heart of Europe.”
Much of this economic collapse will affect the neighboring countries of the war. Growth projections for the euro area fell sharply to 0.3% from the 1.6% predicted in June. Energy prices will greatly increase inflation, which will reach 8.1% this year and 6.2% in 2023.
-Winter is coming
The war in Ukraine is entering a critical phase. Winter is coming and it will be tough. It is difficult for the Ukrainian people and armed forces fighting for their freedom and those who support them.
The winter fuel crisis is something European officials and diplomats think about every day, with Russia accounting for around 55% of Europe’s total gas imports in 2021.
European countries are also thirsty for Russian oil, and almost half of Russian oil exports go to the continent. The EU is reportedly importing 2.2 million barrels of crude oil per day in 2021.
“Within the European Union this will be very difficult and we must try to stick to our promise to cut off Russia when it comes to any profit from gas and other resources,” said a senior European diplomat, referring to an agreement reached within the European Union. EU member states will reduce Russian gas by 15%.
The next few months will be the most difficult for European countries since the start of the war. Citizens will feel the sting of the cost of living across the continent. Some will have to choose between heating their homes and eating out. This crisis comes as many European countries are already hosting thousands of Ukrainian refugees. Against this backdrop, it’s hard for political leaders to justify spending money and energy to support a country far away, especially when some of its citizens feel they are generous enough.
Europe is preparing for a winter that will be characterized by a shortage of gas, one of its most essential products.
Faced with this complex situation, EU governments reached an agreement a month ago to reduce gas consumption from August this year to March next year. But it was slightly lower when Moscow’s gas reduction measures were implemented, and now with new cuts, the EU is threatening to ration more gas with tougher interventions.
For some European countries just weeks before the cold season, the measures taken by Europe may be insufficient, not because they are ineffective, but because the days are passing, and because Russia – in addition to the nuclear button – has the gas switch. A source that the Union accuses of using the Kremlin as a “weapon of war”.
Winter is approaching and gas is scarce, new pipeline construction projects are still not bearing fruit. September is coming to an end and with that, Europe needs enough gas on the eve of winter in a new situation for the Union that we don’t know how to develop.
-Current cases in Germany
Middle- and low-income families in Germany are struggling to cope with rising inflation and skyrocketing energy prices, angered by what they see as the inaction of governments by their plight.
Retired Ramona, who lives in the capital Berlin, told Anadolu Agency (AA) that they are looking for ways to reduce their electricity and water bills, saying “People are worried”.
“We’ve already replaced the shower head and faucets (with water-saving versions) and we’re just going to turn on the heat in the living room,” she said.
Sabine, a working mom, said that even at discount chains, food prices are rising and everything is getting more and more expensive.
“I now have to calculate at least 50 euros ($50.7) a week more for what I used to pay for three people. It’s very difficult,” he said.
Rising oil and gas prices have forced people to change their habits to make a living. They are changing the way they shop and reducing spending on vacations and leisure activities.
Sandro, a father, said, “I have a car, but I cycle or take the train,” adding that he is doing everything to keep up with inflation and rising energy bills.
“I try not to use heat, not to run electrical appliances. I do my best to save money,” he said.
According to the latest estimates, German households will have to pay around 3,500 euros for gas this year – nearly three times what they paid last year.
Jurgen, the father of four, said that they took energy-saving measures and even took cold showers, but it was very difficult to cope with the rising energy bills.
He criticized the government for not doing enough to ease the burden of citizens and abandoning them.
“It’s very difficult as a family of six. Too little to live, too much to die,” he said.
-Positive outlook for long-term green energy use…
Many governments want to create secure energy sources, in part by increasing local resources. In most cases, the only option is zero carbon technologies, led by renewable energy sources such as solar and wind power.
Europe lost its biggest energy supplier, Russia, almost overnight. China and India, which produce very few domestic fossil fuels other than coal, have also seen the dangers of being overly dependent on other countries. Even when purchasing Russian oil at discounted prices, the two countries are increasing their renewable energy production.
Meanwhile, tensions between America and China helped shape Joe Biden’s Inflation Reduction Act, which would provide $369 billion in clean energy. Part of the law’s motivation is to build a domestic clean-tech manufacturing sector to avoid America dependent on Chinese kit for batteries, solar panels, and wind farms.
Many gas infrastructure projects will remain on the drawing board, except those configured to switch to green hydrogen made with renewable energy whenever economically feasible. Moreover, most of Russia’s gas could be permanently grounded, as it would be expensive to build new pipelines to China and Beijing would not want to be too dependent on Moscow’s gas.
Meanwhile, consumers aren’t switching to renewable energy just because it’s cheaper. Adair Turner, head of the Commission on Energy Conversions, says the Ukraine war has made people around the world more aware of the damage caused by volatile fossil fuel prices. According to the IEA, renewable energy will set another global record this year. The agency now expects global gas demand to increase by less than half the amount it previously forecast between 2021 and 2025.
Economic and political unrest
Haskel is an external member of the BoE’s Monetary Policy Committee and one of three policymakers who voted this week to raise interest rates by three-quarters to 2.5%, rather than the half-point increase favored by the majority.
“Having a fiscal expansion in a tight supply context, I’m afraid, is very difficult,” he said during a panel discussion hosted by London’s North West Reform Synagogue.
British inflation hit a 40-year high of 10.1% in July, and the BoE raised half a percentage point in two consecutive interest rate meetings, the largest rate hikes since 1995.
Finance Minister Kwasi Kwarteng will provide more details on the government’s economic plans in Friday’s financial statement. It is expected to approve about £30bn ($34bn) of permanent tax cuts and detail energy subsidies for households and businesses that could cost £100bn.
Italy has approved an aid package worth around 14 billion euros ($14 billion) to protect firms and families from rising energy costs, in possibly the last major act of Prime Minister Mario Draghi, who stepped down before the September 25 election.
The latest measures come above the nearly 52 billion euros already budgeted since January to soften the energy crisis in Italy.
They will be financed by higher value-added tax revenues as a result of rising electricity and gas bills and adjustments elsewhere in the state budget without resorting to the extra borrowing demanded by some parties.
As part of the new aid package, Rome is increasing and extending the existing tax breaks that help firms pay lower electricity and gas bills until November.
A new government guarantees scheme will help companies facing liquidity problems due to very high energy costs.
A draft of the government decree, seen by Reuters, showed that state export agency SACE would issue free guarantees for loans no higher than what government bonds of the same maturity pay.
The financing aims to help pay the energy bills issued in 4Q22.
Germany will spend at least 65 billion euros ($64.7 billion) to protect customers and businesses from rising inflation, German Chancellor Olaf Scholz said on September 4th, two days after Russia announced it was suspending some gas distributions indefinitely.
Measures agreed upon after 22 hours of talks between the three coalition parties included benefits payables and a public transport subsidy, highlighting a tax on electricity companies and Germany’s planned 15% global minimum corporate tax.
Germany’s aid package to help citizens and companies cope with rising inflation will cost 13 billion euros ($12.86 billion) this year, of which the federal government will provide 12 billion, the finance ministry said.
With annual inflation reaching 7.9% in August, Berlin came under pressure to provide more assistance to consumers and businesses affected by the rise in energy prices.
According to the ministry breakdown of the package, aid for 2023 will be around 42.5 billion euros, of which 24.6 billion euros will come from federal coffers.
According to the document, a one-time payment of 300 euros for retirees will reach 6 billion euros, consuming almost half of the aid promised for 2022, while energy-intensive firms will receive a total of 3 billion euros this year and over the next year.
In 2022 and 2023, about 8.5 billion euros will go towards reducing the value-added tax on gas consumption.
The largest portion of the funds allocated, about 10.1 billion euros, will be dedicated to raising income tax thresholds in 2023 in response to inflation, as stated in August.
The discounted public transport ticket, the successor to the very popular €9 ticket offered this summer, will cost €3 billion next year.
The ministry said the fault did not yet include the financial implications of delaying a CO2 price hike, an agreed electricity price cap, or reducing soaring grid fees that exceed 10 billion euros.
Turkey’s growth prospects. OECD revised its 2022 GDP growth forecast for Turkey. The OECD now expects Turkey’s GDP to increase by 5.4% in 2022 (revised from the previous 3.7%) and by 3% in 2023. However, inflation in Turkey is very high and is expected to remain stable at 71% until the end of 2022 (revised marginally from 72%). It is expected to be 40.8% (from 38.9%) by the end of 2023.
Conclusion? In terms of growth; The headwinds towards global growth are expected to increase in the coming quarters. Global leading indicators point to weakening momentum and global purchasing manager indices are slipping and approaching contraction territory.
In fact, the Conference Board now expects moderate recessions in the US and Europe at the end of 2022 and early 2023. The US recession is likely to result from aggressive monetary policy tightening in response to high inflation, and the European recession will likely reflect this.
China may survive the recession but will experience weak growth in 2022 due to repeated lockdowns, housing correction and weakening external growth, and only modest recovery in 2023. Their estimates for global GDP are 2.7% in 2022 and 1.7% in 2023.
Environmentally friendly investments;
The rapid spread of clean technologies is creating economies of scale, driving costs down faster than previously anticipated. This will make solar and wind power more affordable when supply chains are expanded. This will also accelerate the point at which renewable technologies are becoming financially attractive and will skyrocket, says Nigel Topping, Senior Climate Action Champion at COP26. There is a particular excitement about green hydrogen, which can store electricity, be used to make steel, and power ships.
The world, meanwhile, is far from the Paris Agreement’s commitment to limit global warming to well below 2 degrees Celsius below pre-industrial levels. According to Climate Action Tracker, the world is heading towards a warming of at least 2.4 degrees, if not more.
What’s more, the planet may be closer to causing more devastating climate change than anticipated. This year’s massive floods in Pakistan and heatwaves in Europe show that the effects of global warming are already coming. The invasion of Ukraine may have spurred the world to emit less carbon. But he may also have less time to act.
Most developed countries are increasing their spending fiscal packages to mitigate rising prices as much as possible. As we have seen in the examples of England, Italy and Germany, the leaders concerned are preparing to increase their fiscal deficits so that their populations can survive the expected harsh winter.
Kaynak: Tera Yatırım-Enver Erkan
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