Macroeconomic environment

Economic growth remained at relatively high levels during the first half of 2022. The savings previously accumulated, the normalization of activity following the restrictions and disruptions generated by the COVID-19 pandemic, as well as the dynamism of labor markets, have contributed significantly to the performance of private consumption and the service sector.

However, the global economy is showing increasing signs of slowdown, in an environment affected by strong inflationary pressures, an aggressive tightening of monetary conditions, the negative impact of the war in Ukraine and the slower growth in China.

Inflation remains high and continues to surprise on the upside. In annual terms, in September inflation reached 9.9% in the Eurozone and 8.2% in the United States. Many commodity prices and disruptions in global supply chains have moderated in recent months, to some extent due to the expected lower global demand, although they remain relatively high. The significant increase in the price of gas, caused by supply restrictions by Russia, has reinforced the pressure on prices, mainly in Europe. In addition to showing greater persistence, inflationary pressures have also spread to more types of goods and services in recent months.

Against this backdrop, central banks have launched a process of tightening monetary conditions, more aggressive than expected by most analysts. In particular, the US Federal Reserve (“the Fed”) has raised policy rates by 300 basis points since the beginning of the year 2022 up to 3.25% in September and has started selling assets to reduce the size of its balance sheet. The Fed has also announced that interest rates will continue to rise in the coming months. According to BBVA Research, interest rates are expected to reach around 4.75% by the beginning of 2023. In the Eurozone, the ECB has raised official interest rates by 125 basis points from July to September. Therefore, both in the Eurozone and in the United States, it is most likely than not that interest rates will soon converge to clearly contractionary levels, given the commitment by central banks to control inflation despite the eventual negative effects on economic activity.

In a context of high uncertainty, BBVA Research's central scenario estimates that the global economy will slow down significantly in the near future, with possible episodes of recession in the Eurozone and the United States. The tightening of monetary conditions would be the main driver of this slowdown, in an environment where commodity prices (in particular, gas prices in Europe) and supply disruptions will continue to negatively weight on activity.

According to BBVA Research, after rising 6.2% in 2021, global GDP will grow 3.2% in 2022 and 2.4% in 2023, down 0.2 and 0.1 percentage points, respectively, from the previous estimate three months ago. In the US, growth would slow to 1.7% in 2022 and 0.5% in 2023, when strong monetary tightening is expected to cause a mild recession. In the Eurozone, GDP is expected to slightly fall in the coming quarters, mainly due to the disruptions caused by the war in Ukraine, including high gas prices. Annual growth in the region would be 3.1% in 2022 and -0.1% in 2023. China's economy is expected to grow at 3.6% in 2022 and 5.2% in 2023. However, the continued implementation of strict measures to contain the spread of Coronavirus which could lead to further restrictions on mobility in the future, and the financial strains caused by imbalances in real estate markets could trigger lower-than-expected economic growth.

The risks around this central scenario are significant and have a downward bias on BBVA Research's growth forecasts. In particular, sustained inflation could trigger even stronger interest rates hikes and therefore, a deeper and more widespread recession, as well as financial volatility scenario.