HIGHLIGHTS • Growth forecasts lowered due to Russian assault and China’s Covid lockdowns • High inflation to continue, hurting households’ purchasing power • Central banks to tighten monetary policy in the US and Euro Area • EUR/USD turning point approaching GLOBAL AND FINANCIAL MARKETS OVERVIEW Stressed The Russian assault on Ukraine, very high inflation and China’s lockdowns imply a high degree of uncertainty in the global economy and take the growth forecasts somewhat lower for 2022. Despite the downside risks to the growth outlook, high in- flation dominates the outlook in the short term and will force central banks to tighten monetary policy at a faster pace than previously expected. The global outlook has been hit by two major shocks this year. The Russian assault and China’s Covid lock - downs take our growth forecasts lower. Although the direct impact of these two shocks on economic growth in the Western countries has so far been limited, it will further intensify price pressures and challenges in the global supply chains. We thus expect inflation to con- tinue at high levels for all of 2022, and the Western cen- tral banks will tighten monetary policy faster than we expected in our winter forecast. In China, of course, the policy stance is the opposite as its leaders want to sta- bilise the weakened growth outlook leading up to the important Party Meeting in the autumn. The outcome of the war, reactions to monetary policy tightening and Chi na’s exit from Covid are all highly un- certain. Risks to our baseline forecasts are large and bi- ased to the downside. One possible risk is that the EU bans energy imports from Russia as a whole. That would not only take inflation even higher but would also lead to restrictions on energy consumption in the EU and thus a decline in economic activity. Regarding China, the possibility of a nationwide lockdown cannot be excluded given how easily Omicron spreads. In the US, the biggest risks continue to be linked to the strong inflation cycle and the capability of the Fed to bring that under control in a balanced way. Elevated oil prices ahead Oil prices have risen above USD 100 per barrel during the first quarter of the year due to a tighter balance be- tween supply and demand and the war in Ukraine. We expect prices to move sideways around USD 100 per barrel going forward. Global oil investments are on the rise, however, demand for oil will likely also continue to rise as global travel resumes. There are many risks for the oil price ahead. Tight labour markets, high cost in- flation and supply chain issues are curbing growth in oil production. There is no quick fix to these issues, and oil prices could remain elevated. However, there are also risks on the demand side stemming not least from the coronavirus-related lockdowns in China. When will inflation calm down? Inflation has recently accelerated even further as the war has increased price pressures on energy, raw mate- rials and food. We expect those pressures to continue, and goods price inflation to be boosted also by the lock- downs in China and the resulting challenges in global supply chains. Thus, the short-term outlook speaks for very high inflation. From the central banks’ point of view, it is of course im- portant to understand the inflation outlook longer out. In this regard, wage and price pressures in the US con- tinue to be extremely strong, and the signals of over- heating are even stronger than in our previous forecast. In the Euro area, recovery from the pandemic has con- tinued, but households are in a relatively weak position as nominal income growth is still modest. Together with fast inflation, this implies that real income development will be negative in 2022. However, as long as the eco- nomic outlook remains robust enough despite the ele- vated uncertainty, wage increases will accelerate later this year, which will imply that core inflation is likely to continue at levels around the ECB target in 2023. 3.3 % Global GDP growth in 2022 7.5% Consumer price in- flation in the Euro area in April 2022 $100 Expected oil price during the forecast horizon 06 / Nordea Economic Outlook / 2 / 2022
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