Central banks are currently facing a complex situation: ignoring the inflation crisis is not an option but tightening too fast could easily tip the economy towards a recession.
The economic growth projections have been lowered across all economies, largely in reaction to the recent commodity price shock following on from Russia’s invasion of Ukraine, but also factoring in a tighter monetary regime.
The combination of earlier and steeper monetary policy normalisation and the spike in oil prices may reduce conviction in the global economy and increase a recession risk. But the stagflationary shock from the Ukrainian crisis and Russian sanctions has impacted Eurozone and UK projections more significantly, given their economic connectivity and dependency on Russian oil and gas exports.
What consumer trends are we seeing?
Consumers were the primary drivers of the rapid economic recovery, strengthened by massive direct fiscal and monetary support. Huge excess savings built up in developed countries during national lockdowns fuelled the massive boost in goods spending (as services remained shut) and led to the supply-demand imbalances. Although consumer spending patterns have eased as the economies have re-opened, the overall momentum is still very strong.
In addition to consumers, companies also benefitted significantly from the confluence of fiscal and monetary support. Across almost all major economies, both banks and corporates have entered this uncertain period with strong balance sheets and high cash balances. The general sentiment is still mainly positive, but this could shift in the coming months.
Our perspective
We have always viewed 2022 as the year of transition from exceptionally strong (above trend growth) to a slower growth trajectory in 2023. However, recent events (including the desire of central banks to tackle inflation) have raised the prospect of a quicker transition towards trend growth. The US Treasury yield curve is also beginning to signal a potential recession, the probability is still low but certainly not insignificant.
