Geopolitical uncertainty reduces economic growth prospects and increases inflationary pressures

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Geopolitical uncertainty reduces economic growth prospects and increases inflationary pressures

Posted on April 6, 2022

  • The Russian-Ukrainian war will reduce global growth prospects and increase inflationary pressures
  • Changing central bank guidance could increase market volatility
  • Ongoing geopolitical uncertainties could lead to further disruptions in production and trade

KPMG GLOBAL ECONOMIC OUTLOOK H1’2022

The ongoing conflict in Ukraine is expected to reduce global growth prospects and increase inflationary pressures around the world, according to KPMG’s latest Global Economic Outlook. The semi-annual report provides economic forecasts and analysis from the global organization’s team of economists in territories and regions around the world.

The latest edition, covering the first half of 2022, warns that progress on global issues including public health and climate change has slowed as political and business leaders grapple with the broad implications of the war in Ukraine.

High Inflation Exacerbates Central Banks’ Dilemma

The global economy has emerged from the COVID-19 recession with higher public debt and, as central banks raise interest rates, the cost of servicing sovereign debt is also rising, making it particularly difficult for emerging countries whose debt is denominated in an appreciating US dollar. While policymakers and many businesses are still reeling from the consequences of the pandemic, they are less prepared to counter another significant economic shock.

Global Growth Prospects

Prospects for the next two years will depend on the evolution of the conflict between Russia and Ukraine. With so much uncertainty at present, KPMG’s Global Economic Outlook has developed three scenarios to examine the outlook for the global economy:

  • The main scenario assumes that global oil prices will be USD 30 higher than before the crisis escalated, while gas prices will be 50% higher across Europe. It also factors in a 5% rise in world food prices.
  • A more severe scenario examines the potential impact of a $40 increase in world oil prices, combined with a 100% increase in gas prices for Europe and a 50% increase in gas prices for the rest of the world . This bearish scenario also assumes a 10% increase in global food prices. Both scenarios incorporate a 23% increase in average metal prices and a 4% increase in the cost of agricultural inputs. They also include higher investment risk premiums and additional government spending in Europe.
  • The report’s upside scenario examines the possible outcome should the conflict resolve sooner than expected, with prices returning to early February levels and production and trade flows restored.
Chart: Group of world GDP according to three scenarios

The report’s analysis found that global GDP growth could be between 3.3% and 4% this year and between 2.5% and 3.2% in 2023, depending on the scenario. Risks to KPMG’s outlook are currently tilted to the downside. It is possible to envisage that the conflict between Russia and Ukraine will escalate beyond the report’s pessimistic scenario, with energy supply cuts, for example, causing a significant disruption of production in parts of Europe. The COVID-19 pandemic continues to drive shutdowns in major economies such as China, and a new wave could undo progress made in easing global supply chain lockdowns.

Gary Reader, Global Head of Clients and Markets at KPMG, said: “Before the outbreak of war in Ukraine, different territories and regions were at different stages of their post-COVID-19 economic recovery, and this is reflected in the analysis by our Chief Economists. But, while GDP forecasts vary, there are a number of clear and consistent themes and threats facing the planet. Armed conflicts may currently be confined to Eastern Europe, but they already have far-reaching consequences for all nations.

“Supply chain issues have escalated from a post-covid problem to a major immediate threat, with potential shortages of natural gas, metals and grains, among others. While shortages will impact all territories, we foresee a disproportionate impact on some of the world’s poorest places and people, compounding the long-term challenges to the planet’s collective recovery. world, raising the threat of a global cost-of-living crisis. Economic forecasting is not a perfect science, but what KPMG’s Global Economic Outlook does is shine a light on the way forward, providing some degree of guidance in an increasingly difficult journey.

India Highlights

India’s economy is expected to continue its positive growth trajectory, however, recent geopolitical developments are hurting national equity indices and creating volatility in crude oil prices and exchange rates. Given India’s dependence on imports of crude oil, natural gas and other raw materials, a spike in inflation and the current account deficit are aspects to watch, especially given the evolution of the geopolitical situation. Moreover, the uncertainty regarding the fourth wave and viral mutations pose a significant risk to the future growth of the Indian economy.

Commenting on the India highlights, Preeti Sitaram, Head of Government and Public Services, KPMG India, said: “The continued rise in High Frequency Indicators (HFI) and GDP growth figures over the past two quarters point to an economic recovery in India. In addition, the government’s push for infrastructure development and domestic manufacturing is expected to support this growth, create more jobs and help build supply chain resilience. However, turbulent crude oil and commodity prices due to current geopolitical uncertainties are leading to high input prices for industries and supply chain disruptions that could pose a threat to the country’s economic growth plans. short term.

The pdf report is attached for your reading. Please do not hesitate to contact me for further details.

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