Economic numbers are starting to come out now for the first quarter of 2022. We are starting to get a picture of what impact the current geopolitical turmoil is causing to the world and it does not look good at all. (Listen HERE)
First, let’s talk about Inflation. For the Eurozone, according to Eurostat, the March annual increase of consumer prices is estimated to have reached 7.5%. That’s still an estimate but the final number will not be far from that 7.5%.
Consider this; one year ago in March 2021, we were at a +1.3% annual increase and six months later in October 2021 we climbed to +4.1% annually. Of course, prior to the war in Ukraine, we were blaming Covid with its subsequent disruptions on global supply chains. Since February of this year, we now have to add that other layer of geopolitical uncertainty.
Needless to say that we should take a closer look at energy prices. They were +44.7% higher than a year ago in March 2022. And of course, don’t think that it’s all because of geopolitics. Six months earlier in October 2021, they were already +23.7% higher than a year earlier.
In the US, the Consumer Price Index followed the same trajectory; from a +4.2% annual increase, in April 2021, it jumped to +8.5% annual increase in March 2022. And just like in Europe, energy represented the brunt of that increase with a +32% annual jump.
As a result, the main concerns now are manifolds. First, because these energy costs are causing a ripple effect of chain reactions in all directions throughout all value chains. It’s an explosion of multidimensional second round effects that are difficult to estimate. Second, because these price increases are eating away at the nominal gains in growth.
Growth is indeed at risk.
After the large rebounds that we had experienced at the end of 2021, as all economies were coming out of the COVID crisis, the first quarter now looks like it is more likely to produce real growth increases that are flat across the industrial world, and may be even negative for some of the industrialized countries.
That’s what happened in the US during the first quarter of 2022. Although real GDP did grow +3.5% year on year in the first quarter of 2022, the quarterly change from the 4th quarter of 2021 to the first quarter of 2022, did decline by -0.4%. Should the second quarter of 2022 also post another quarterly decline, we would then be in a textbook recession. That’s how recessions are officially defined; when two consecutive quarters decline. There is a great probability that this is what will happen.
And of course that will all be due to inflation. First, through the fact that inflation eats away from the nominal growth produced by the economy. And second, because of the dampening effect it has on real income. Once you notice that downward spiral of higher inflation eroding nominal gains on the economy, it becomes increasingly difficult to stay on course. Debt servicing explodes and cannot be covered by the real gains generated by growth. Meanwhile, savings are also eroded because interest served on deposits does not compensate for the loss of value in money.
This is all happening at the worst possible time in these cycles of debt for many countries. In the US, the debt to GDP ratio is now at an all time high of 133%, in France it’s at 116%, 159% in Italy, 110% in Canada. And I am not even mentioning Japan at 257%. For information, China’s debt to GDP ratio is at 69%, not too far from the 73% in Germany. We can already suspect which countries will have trouble facing the next wave of interest rate hikes.
That’s what I wanted to share with you.
Let me know if you have questions and I look forward to hearing your thoughts. Feel free to comment.