June 27, 2022/Cordros Report
The global economy started the year with the optimism of growth consolidation given the continued normalisation of economic activities, and as supply chain constraints were expected to ease further into the year. However, the Russia-Ukraine conflict and the associated sanctions by NATO and its allies have negatively impacted global trade and stoked inflationary pressures. Simultaneously, external demand conditions have slowed given China’s strict zero-COVID policy as COVID-19 infection rates spiked in key cities, Shanghai and Beijing. Meanwhile, global financing conditions have remained tight, synchronizing neatly with monetary policy tightening by systemic global central banks as inflationary pressures prove to no longer be transitory.
Global growth is now expected to decelerate sharply from the initial post COVID-19 boost witnessed in 2021FY, given the heightened uncertainties amid ‘the great policy unwind’. For one, the Russia-Ukraine conflict is ensuring inflationary pressures remain at record highs, which in turn is weakening consumer spending. Elsewhere, the pass-through impact of weak external demand from China on other economies is expected to linger amidst persistent supply chain disruptions. Nonetheless, we highlight risks to the growth outlook – (1) increased social unrest as a result of elevated consumer prices, (2) higher-than-expected slowdown in China, (3) worsening of the Russia-Ukraine conflict, and (4) higher interest rates and tighter global financing conditions leading to widespread debt distress.
Global central banks remain committed to re-anchoring inflation expectations while reining in inflationary pressures given demand/supply imbalances. Accordingly, most central banks in advanced economies are increasing monetary policy rates towards restrictive levels from the ultra-lows at the start of the year, while also curtailing their respective net asset purchase programs. Similarly, several emerging markets and developing economies have mirrored the policy responses of advanced economies, given the persistent rise in inflationary pressures and the attendant impact of capital flow reversals on currencies. Overall, we expect the hawkish monetary policy stances to be maintained through 2022FY, as inflationary pressures are expected to remain.
On crude oil, we lower our growth expectations for demand, factoring in the Russia-Ukraine crisis, slowing global economic growth and COVID-19 related lockdowns in China. On supply, although we expect OPEC+ steady production cut unwinding coupled with increased output from non-OPEC countries will support supply growth, we believe the disruption to Russia’s crude oil exports as top consumers have reduced imports will temper the pace of increase. Therefore, considering the current market dynamics, future expectations and factoring speculative effects, we expect the Brent crude price will average USD106.00/bbl. in 2022FY.
