Macroeconomic environment
The global economy has decelerated throughout the course 2022, in an environment marked by strong inflationary pressures, an aggressive tightening of monetary conditions, the adverse impact of the war in Ukraine and slower growth in China.
Despite the slowing trend, economic growth showed some resilience and was generally higher than expected by most analysts. This was due to previously accumulated savings, the process of normalization of activity after the restrictions and disruptions generated by the COVID-19 pandemic, and the dynamism of the labor markets, which contributed to an improvement in private consumption and the service sector.
Inflation remained at elevated levels in 2022. However, after surprising on the upside for most of the year, it started to moderate in recent months. This is in line with the slowing trend in aggregate demand, the recent moderation in energy prices and normalization in global supply chains. At year-end, annual inflation stood at 6.5% in the United States and 9.2% in the Eurozone.
Against this backdrop of still elevated inflationary pressures, central banks continued to tighten monetary policy. The U.S. Federal Reserve ("the Fed") raised benchmark interest rates to 4.5% in December (a level 425 basis points higher than at the beginning of 2022) and kept up asset sales to reduce the size of its balance sheet. Further, the Fed indicated that interest rate hikes will continue in the coming months, albeit at a slower pace. In the Eurozone, the ECB has raised interest rates for its refinancing operations to 2.5% in December (a level 250 basis points higher than at the start of 2022). In addition, the central bank has tightened the conditions of its liquidity supply to banks through the TLTRO operations (targeted long-term refinancing operations) and has indicated that it will soon initiate a program to sell its assets. In a context of high uncertainty, BBVA Research's central scenario estimates that the global economy will continue to slow down in the near future, with possible episodes of recession in the Eurozone and the United States. This slowdown in growth will be mainly due to the significant tightening of monetary conditions (interest rates are expected to reach close to 5.0% in the United States and 3.75% in the Eurozone in the coming months; these are clearly contractionary levels, which will remain unchanged until at least the final months of the year 2023) and inflationary pressures are still significant, despite the prospects for moderation.
According to BBVA Research, after growing by 6.3% in 2021 and around 3.3% in 2022, global GDP will grow by only 2.3% in 2023. In the United States, growth would slow to 1.9% in 2022 and 0.5% in 2023, as strong monetary tightening is expected to cause a downward adjustment on growth. In the Eurozone, GDP is expected to slightly fall in the coming quarters, primarily due to the disruptions created by the war in Ukraine, including still high gas prices. The annual growth in the region would be 3.2% in 2022 and -0.1% in 2023. In China, the growth would reach 3,0% in 2022 and 5,0% in 2023, but the wider spread of COVID-19 infections following the financial strains caused by imbalances in real estate markets could trigger slower-than-expected economic growth.
The uncertainty remains at high levels and the risks could have a downward bias on growth. Specifically, sustainable inflation could trigger even stronger interest rate hikes and therefore, a deeper and more widespread recession, as well as higher financial volatility.