“In Europe and the United States, the risk of a recession in 2023 is increasing”

What do you think of the figures for – non – American and French growth in the first quarter?

Counterintuitively, the figures for the United States are very good, unlike for France. Either way, it’s kind of the same story. Post-pandemic effects still disturb the analysis of macroeconomic data, this is the case of stocks. During the pandemic, the world produced less for various reasons, so companies massively destocked. Then they restocked as soon as they could. But if you store a volume of 10, then a volume of 5 the next quarter, your contribution to GDP is -50%. This had a negative impact on US GDP. Just like imports, which only reflect the fact that consumption is so strong in the United States that local production cannot keep up. Final demand, which remains the heart of American activity, is still very vigorous. Unfortunately, the same analysis is worrying in France. Underlying domestic demand was very weak in the first quarter.

“Less growth, more inflation, the world is experiencing a real shock of a stagflationary nature”

Stagflation, recession: can the world still escape these evils?

The risks are great, but there is a way. In any case, we cannot escape an economic slowdown. There is a mechanical reason for this: after a period of very strong post-pandemic growth, it is quite normal to return to the pre-crisis trend. The problem is that we are coming back to it more quickly than what was planned before the invasion of Ukraine. This war is a very significant headwind because it generates a price shock, which erodes purchasing power. Less growth, more inflation, the world is undergoing a real shock of a stagflationary nature.

On the other hand, we should escape recession this year, and therefore full stagflation, because we are starting from a very high position. In normal times, a price shock such as the one we are experiencing and its impact on demand would be recessive. But this year, European growth was expected above 3%. It can remain in expansion even if we remove 1.5 to 2 points. That said, the risks increase in 2023 for Europe and the United States due to American monetary policy.

Will the fall in GDP in the first quarter prevent the Fed from raising its interest rates?

In the United States, employment is bubbling, final demand is very strong, as is investment and inflation. The Fed is on a very rapid rate tightening process, it has no choice but to be aggressive, and this is a threat to activity next year. This is our baseline scenario. There are opportunities for a soft landing. The “miracle” scenario would be for inflation to peak quickly and turn around convincingly enough to allow the US central bank to be a little less strict.

What does the Chinese economic threat represent today?

China is one of three headwinds weighing on the global economy, along with the effects of the war in Ukraine and the Fed. It faces an accumulation of well-known challenges. In the long term, it is about the evolution of its demography, as well as the natural slowdown of the country’s growth, which is changing its model to become a middle-class economy driven by its domestic demand. In the short term, Beijing must manage excess credit in real estate and construction, to which must be added the shock of the Covid. All this against the backdrop of the upcoming 20th Congress of the Chinese Communist Party, during which Xi Jinping wants to be re-elected president for a third term. On the part of the authorities, we sense a desire to control everything, with two objectives, stability (of the currency, societal, financial, etc.), while preventing growth from slowing down too much. In its current state, the country adds a layer of stagflationary reality, in particular embodied by the virtual closure of the port of Shanghai.

“Rising interest rates is like taking oxygen out of the air. This is where the accidents start to happen”

Inflation, rising interest rates, falling euro… what is the most disturbing element?

Everything is connected. A strong recovery generated bearable price increases as long as growth was dynamic. But raising interest rates is like taking oxygen out of the air. This is where the accidents start to happen. Market investors feel that nothing good can happen until inflation returns to more acceptable levels, allowing the Fed to be less demanding. We are still far from it. There is a real inflation challenge that may last another year or two.

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