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Global growth slows and inflation pressures intensify
amid rising economic headwinds
Global economic growth slowed in April and inflationary
pressures intensified as the Russia-Ukraine war and lockdowns in
China drove increased risk aversion, disrupted supply chains and
lifted prices for many commodities, notably energy and food. In
this special report we draw on analysis and insights from S&P
Global's PMI survey data and its experts from various fields to
provide a comprehensive overview of the current situation and its
implications in the light of the latest survey findings.
Our macroeconomic forecasting team assesses how the war and
latest survey data have altered the economic outlook, policymaking
and recession risks. Our industry specialists provide a deeper dive
into the effects of the invasion on trade and supply chains, as
well as how both new supply disruptions and weakening demand are
set to play out in commodity markets, with additional focus on
energy and agriculture. We also review S&P Global's unique PMI
sector data to highlight how various industries are being affected
by the war, with a special focus on the auto market. Finally, our
risk experts take a look at how the conflict in Ukraine is likely
to play out in the coming weeks.
PMI data show weakest economic growth since June
2020
The pace of global economic growth slowed in April to the lowest
since the downturn of the second quarter of 2020,
according to the latest PMI data compiled for JPMorgan by
S&P Global. The survey data reflect information provided by
panels of over 30,000 companies in 45 countries and are valued as
the earliest indicators of changing economic conditions. The
headline PMI fell from 52.7 in March to 51.0 in April, only
modestly above the no change level of 50.0 to signal a
near-stalling of growth. It was among the lowest readings seen over
the past decade.
Global growth was dragged lower principally by steep
contractions in Russia and mainland China. Barring the initial
COVID-19 outbreak, March and April have seen the largest drops in
Russian output since the global financial crisis. Both
manufacturing output and services activity are falling sharply.
China likewise saw a second month of slumping output in both
manufacturing and services, with rates of decline accelerating in
April to highs exceeded in 18 years of survey history only by the
collapse in output suffered in February 2020.
China's slowdown has been the result of COVID-19 containment
measures having been tightened in April to the most stringent so
far in the pandemic. However, looser covid restrictions in other
economies meant growth elsewhere was often resilient, losing only
marginal momentum in April on average. The US, Eurozone, UK, India
and Brazil in particular all continued to report strong growth.
Supply disruptions and inflation pressures
intensify
Supply chain stress is gauged via the
PMI suppliers' delivery times index. The PMI surveys showed
that supplier lead times have lengthened to unprecedented degrees
during the pandemic, with 2021 seeing new records being broken
month after month in terms of supplier delays. While the opening
months of 2022 saw some moderation in the number of reported
delays, March and April have seen the supply situation worsen
again, linked primarily to the disruptions caused by the Ukraine
war and China's shutdowns. The latter is perhaps of the more
notable concern for the near-term: China's PMI data have shown a
more severe downturn in manufacturing output due to the recent
Omicron outbreaks than seen in the initial COVID-19 shutdowns,
which has the potential to feed through to further supply delays in
coming months.
The supply crisis therefore continues to act as a major support
to prices, especially for goods, placing pricing power in the hands
of the seller. Russian sanctions amid the Ukraine war meanwhile
continue to act as a support to global energy prices, with food
prices also elevated by the conflict.
Growth reliant on consumer spending on
services
Detailed sector PMI data meanwhile revealed a broadening of
both the global economic slowdown and the renewed inflationary
pressures evident across industries in April.
With the exception of the downturn seen in early 2020 during the
initial phase of the pandemic, April saw more sectors reporting
falling output than at any time since 2012. Some 14 of the 26
sectors covered by the PMIs reported falling output in April, up
sharply from just four in March.
The steepest declines were seen in
manufacturing sectors, which as a whole fell back into decline in
April for the first time since mid 2020. Deteriorating supply
chains notably contributed to renewed output falls for autos &
parts and machinery & equipment manufacturing. Consumer goods
manufacturers also suffered a stalling of production as household
spending was diverted to services, reporting the weakest
performance since June 2020, with companies often also reporting
that higher prices were deterring customers.
In contrast, output of consumer-facing services industries rose
worldwide at a rate which, excluding prior pandemic growth spurts
as economies relaxed COVID-19 restrictions, was the strongest since
data were first available in 2009. However, overall service sector
growth slowed, led by the first drop in global real estate activity
since May 2020, with banking services, transportation and
healthcare services all also declining.
Selling prices meanwhile rose in all 26 sectors during April,
with rates of inflation accelerating in all but six sectors. Some
half of all sectors reported unprecedented rates of increase. A
record rise in food prices is a particular concern, especially
given that that the sector has also reported falling output
continually now for three months, with the worsening trend linked
to the Ukraine war.
The latest PMI findings add to evidence that the economic
outlook has darkened since Russia's invasion of Ukraine, and our
global growth forecast has consequently been marked down. This in
part reflects the substantial direct economic damage from the war
but also reflects tighter financial conditions, the withdrawal of
pandemic-related fiscal stimulus, and inflation's toll on consumer
purchasing power and business. China's lockdown represents an
additional headwind. After a 3.4% contraction in 2020 and a strong
5.8% rebound in 2021, world real GDP growth will likely slow to
3.2% in 2022.
As the latest PMI data suggest, the near-term outlook for
inflation has meanwhile deteriorated. Led by surging energy and
food prices, global consumer price inflation will likely pick up
from 3.9% in 2021 to 6.6% in 2022, its highest pace since 1995.
Commodity prices are expected to peak in mid-to-late 2022 and then
retreat in response to rising interest rates, softening demand, and
a gradual improvement in supply conditions.
Russia's war on Ukraine will have the biggest impact on Emerging
Europe, which is set to fall into recession in 2022 as real GDP
plunges 45.7% in Ukraine and 11.1% in Russia. Belarus, Kyrgyzstan,
and Tajikistan will also experience contractions because of close
economic ties with Russia. While other countries in the region will
likely avoid recession, economic growth will weaken. While
Ukraine's economic recovery is expected to take five years,
Russia's recovery could take a full decade amid severe
sanctions.
With inflation pressures building further due to the war, supply
shortages intensifying and uncertainty rising, Western Europe's
real GDP growth will likely slow sharply from 5.6% in 2021 to 2.6%
in 2022 and 1.7% in 2023.
Further afield, the impact of the war will generally be less
marked. With interest rates rising, the US economy faces a
cooling-off period but no recession. US real GDP growth will likely
slow from 5.7% in 2021 to 3.0% in 2022 and 2.8% in 2023.
The Asia Pacific region will sustain robust economic growth,
benefiting from expanding international trade. After 6.1% real GDP
growth in 2021, the region's economy will likely expand about 4.5%
annually over the next three years, accounting for half of global
economic growth.
In Sub-Saharan Africa, the steep rise in global food and fuel
prices due to the Russia-Ukraine war have led several Sub-Saharan
African authorities to introduce renewed or higher subsidies,
temporary price controls, and suspension of selected import customs
duties. These measures will raise public-sector debt levels.
In short, Russia's invasion of Ukraine and the surge in COVID-19
cases in mainland China are the latest in a series of economic
shocks that have disrupted supply chains, fueled inflation, and
slowed economic growth. Yet, as economies reopen, consumer spending
and business investment are proving resilient. The task of subduing
inflation while sustaining economic growth will depend on vigilant
monetary and fiscal policies, improving supply conditions, and a
bit of luck.
Commodities: slower demand growth signals a potential
cap on prices
John
Mothersole| Director - Research, Pricing and
Purchasing, S&P Global Market Intelligence
Continuing disruptions to supply chains, first from the pandemic
with its series of variants, then two overlapping energy crises in
China and Europe late last year, have kept markets off balance and
commodity prices strong for the past year. The latest jolts come
from the Russia-Ukraine war, which threatens Russia commodity
exports, and widening COVID-19 lockdowns in mainland China, which
has been the one reliable supply base for global manufacturing for
the past two years.
The effect of these latest shocks has been another step increase
in commodity prices, with the IHS Markit Materials Price Index
(MPI), a broad collection of raw material prices, establishing a
new record high in early March. The MPI had seemingly peaked back
in May 2021. Indeed, between May and November of last year
commodity prices, as measured by the MPI, declined by slightly more
than 15%. This change in commodity markets was just beginning to
push downstream in supply chains with intermediate goods price
inflation globally beginning to slow.
Commodity prices, however, began rising once again in late
November, jumping 24% between the end of January and early March
alone as the crisis in Ukraine unfolded. The only good news is that
prices have retreated slightly in the seven weeks since. Russian
exports have for the most part continued to flow onto the global
market, albeit with disruptions in Europe, the US and elsewhere
because of buyer boycotts.
Measures of vendor performance - notably PMI gauges of backlogs
of work, supplier delivery times and reported shortages - will
worsen in the months ahead because of altered trade flows and some
loss of supply, providing support to prices this summer.
However, another factor - softening demand - is entering the
picture and may be enough to offset these supply-side effects and
thus keep market balances from worsening. This is what commodity
markets have been pointing to for the past month and a half.
Slower demand growth does signal at least a cap on commodity
prices given the elevated levels they have risen to over the past
two years. The absence of commodity price increases - and more
likely - modest corrections, does mean one source of inflation will
begin to abate over the next year, with a change be apparent in
goods price inflation beginning in the second half of 2022.
Energy: loss of Russian oil offset but further
disruptions cannot be ruled out
Jim Burkhard | Vice President, Energy
Waterborne deliveries of Russian crude oil have generally been
on par with pre-invasion levels through early May, but this is
likely to change as Russian production falls and Europe reduces
Russian oil imports. Lower Russian output will be offset to a
degree by the IEA oil release and weaker demand in China due to
recent lockdowns. But the risk of a larger disruption from Russia
cannot be ruled out. The era of a partitioned oil market has
begun-along with a sharper divide between the interests of
consumers and producers.
It should also be noted that new oil investment may face a less
attractive market in the years ahead, given the desired shift to
non-carbon energy. To account for higher risk and upstream
inflation that is rising at its highest rate in years, the return
required to justify investment is also higher. In our "break-even
analysis" of various sources of oil supply, we have increased the
cost of capital from 10% to 20%. This higher cost of capital is
not, by itself, a guarantee that prices will stay high or move
higher. But it is a force for upward pressure on oil prices over
time.
In the short and medium term, Russian exports and imports are
expected to significantly decrease. The duration and extent of the
drop will not be lower than in the case of Crimea aggression in
2014, which amounted 40% drop in exports and decay of the shock
taking five years. In the long term, the Russian economy can
strengthen the links with mainland China, its largest trade
partner. However, mainland China will not be able to absorb the
whole sanctions-related trade shift.
Russia's aggression is therefore expected to contribute to a
slowing in real value global trade growth to 1.7% from 11.3% in
2021. Similarly, volume growth will drop to 0.5% from 6.8%.
While all modes of transport grew significantly in 2021, growth
will slow across the board in 2022. Seaborne trade volume grew by
4.5% in 2021 and the forecast for 2022 is an increase of 1.9%,
according to the latest model. Overland trade noted significant
growth of 13.6% in 2021, and for 2022 we predict a decline by 3.3%.
Airborne trade will also note a decline in 2022 (by 1.7%), after
impressive (15.3%) growth in 2021.
The cost of containerized transport has meanwhile climbed
sharply compared with pre-COVID-19. In 2021, we have seen record
high freight rates reaching its peak in September 2021-over $11,000
per 40-foot container (FEU)-according to the Freightos Baltic
Global Container Index.
The rise in container transport costs was partially related to
rising fuel prices, but also the global shortage of containers,
continuing significant congestion in many seaports, particularly in
mainland China and the United States; extended restrictions in many
parts of the world because of COVID-19; and growing global demand
in the pandemic recovery. In 2022, freight rates on most trade
lanes will continue to increase due to the replacement demand for
Russia-Ukraine cargo, with backhaul freight rates remaining the
strongest routes.
We do not see any significant relief to the congested supply
chains out of Asia in the short term, as the demand will still be
high in the first half of 2022, slowing gradually in the second
half of the year. In North America, we are also not expecting any
notable change by the end of this year, so most probably we would
see the supply chain recovery taking place no sooner than in
2023.
Agriculture: less than 70% of the potential area for
spring crops will be planted in Ukraine this year
Lee Bridgett | Food and Agricultural Commodities
A major question related to how the war has impacted Ukraine's
spring planting season. While there have been reports of input
shortages such as seed and diesel fuel, spring planting has firmly
gotten underway. Approximately 2 million hectares of crops have
been sown so far, approximately the same level as last year at this
time, according to Ukrainian Deputy Minister of Agrarian Policy and
Food Taras Vysotsky. However, Deputy Minister Vysotsky has also
separately stated that less than 70% of the potential area for
spring crops will be planted this year, in part due to landmines in
the Chernihiv and Sumy oblasts. Vysotsky has reiterated that the
country has sufficient production for domestic needs despite
reduced plantings, and that the country is still expected to have
some level of a production surplus for export.
Limited grain exports have meanwhile resumed to Europe via rail
since the conflict started, but without measures to increase
capacity this is reportedly only capable of shipping 10-15% of
Ukraine's normal export volume. There is an ongoing effort to
reopen supply lines from Ukraine, but how much export volume can be
restored remains to be seen. The EU has announced the establishment
of "green corridors" with Ukraine. These will be fast-tracked
trading routes allowing Ukraine to export goods through Poland and
via the Baltic Sea, rather than through currently blocked Black Sea
ports. Ukraine's Agriculture Ministry is also reportedly in talks
with the Romanian government about exporting agricultural products
through the Romanian port of Constanta.
Automotive: Global Auto Production Forecast Downgraded
Further for 2022
Mark
Fulthorpe| Executive Director, Global Light Vehicle
Production Forecast, plus other Autointelligence experts
The deteriorating picture for the automotive market captured by
the latest PMI data supports our downward revision to our global
light-vehicle production forecast for 2022 and 2023, by about
2.6 million units for each year. Following our March forecast
round, we now expect global light-vehicle production at 81.4
million units in 2022 and 88.5 million units in 2023.
Since the invasion of Ukraine we have significantly reduced the
outlook for vehicle production. In the March forecast release, we
removed 2.6 million units from our 2022 and 2023 outlook, but the
downside risk is enormous and further cuts were made in April. In
March we cut 1.7 million units from European production alone,
which broadly includes just less than 1 million units from lost
demand in Russia and Ukraine. The reasons for the remainder of the
cut are worsening semiconductor supply issues and a loss of
Ukraine-sourced wiring harnesses and other components, both of
which will affect production in other markets. April saw a further
reduction in the outlook, to 80.6 million units and 87.8 million
units respectively as the effects of lockdown in mainland China,
particularly in Shanghai, compounded the worsening situation.
Broader, extended lockdowns in mainland China and the complete
loss of Russian palladium supply are the greatest potential risks
to the industry. In total, over 30 million units have been removed
from our light-vehicle production forecast between now and
2030.
Palladium: Next potential challenge
Although of low probability currently, palladium has the
potential to become the industry's biggest supply constraint.
Russia produces 40% of the world's mined palladium, according to
the United States Geological Survey. Around two-thirds of palladium
use is in vehicles, where it is the active element in catalytic
converters for exhaust after-treatment. If Russian palladium
supplies were suddenly interrupted (due to a Western boycott, or
Russia stopping supplies), production of all vehicles using such
sourced material (including hybrids) could potentially stop.
On 18 April Russia reportedly began the so-called 'Phase 2' of
its 'special military operation' in Ukraine, the Kremlin's stated
objective of which is to capture all of the Donbas region. If
successful, it would enable Russian President Vladimir Putin to
claim 'victory' and call for a ceasefire. On 30 April, Russia's
Foreign Minister Sergei Lavrov said that the Russian government was
'not setting any specific dates for its military forces in
Ukraine', which indicates the government's acceptance that fighting
will be protracted,
and that it is managing the Russian public's expectations prior
to Putin's address at the 9 May Victory Day celebrations.
The Russian ground forces' ability to achieve this objective
within Putin's likely preferred timeline is in doubt, given their
performance to date and their substantial losses, and likely combat
fatigue, among most of the forces involved.
A claim by a senior Russian officer, Major General Rustam
Minnekayev, made on 22 April, that Russia's objective is to take
control of all of Ukraine's Black Sea coast to the borders of
Moldova and Romania, and unexplained security incidents on 25-26
April in breakaway Transdniestria, a pro-Russian entity in Moldova,
were probably elements of a deception plan aimed at keeping
Ukrainian forces tied down covering the Odesa direction. An
operation of this scale, concurrent with the Donbas offensive,
would be beyond the capacity of Russian ground forces currently
deployed in Ukraine.
Posted 09 May 2022 by Alex Kokcharov, Principal Country Risk Research Analyst, Europe and CIS, IHS Markit and
Chris Williamson, Chief Business Economist, S&P Global Market Intelligence and
Jim Burkhard, Vice President & Head of research for oil markets, energy & mobility, S&P Global Commodity Insights and
John Mothersole, Director of Research, Pricing and Purchasing, S&P Global Market Intelligence and
Mark Fulthorpe, Executive Director, Global Light Vehicle Production Forecast, S&P Global Mobility
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
