During this year’s first quarter, the U.S. economy shrank 1.4 percent and the European Union’s economy grew 0.2 percent compared to 0.3 percent in 2021’s final three months. (See related story in this issue.)
Spain’s GDP expanded 0.3 percent, a fraction of the 2.2 percent it saw in last year’s fourth quarter. In France, the economy was flat; Italy’s output was down 0.2 percent.
China reported 4.8-percent expansion during the period, short of its 5.5-percent target for the year. (See related story in this issue.)
“The overarching message is that the global growth outlook is souring and it is deteriorating at a faster rate and in a more serious way than most analysts had anticipated,” Neil Shearing, chief group economist at Capital Economics, told The New York Times.
China’s growth has been damaged by its wobbly real estate sector, regulatory battles in the tech and retail industries, and widespread COVID-related lockdowns. Europe is taking an economic beating from the Ukraine war.
The U.S. economy is battered by inflation and rising interest rates.
However, the U.S. also has reached maximum employment and consumers continue their relentless spending, giving analysts hope that the first quarter’s contraction was not structural but due to one-time blips in measures, the NYT noted.
“Growth around the world is evolving at different speeds, but inflation is present almost everywhere in most sectors,” EY-Parthenon chief economist Gregory Daco told the NYT.
Europe’s inflation rate edged up from 7.4 percent in March to 7.5 percent in April; in the U.S., the pace was a 40-year-high 7.9 percent.
Although wages in the U.S. rose at a near-record pace through 2021, inflation has shrunk actual spendable incomes for four quarters in a row.
Inflation was running strong at the beginning of the year as well, but supply lines were opening again and the COVID virus seemed to be waning.
Then Russia invaded Ukraine, disrupting world food supplies. Western allies hit Russia with massive sanctions, worsening global shortages of not only food but also other essentials.
“We are seeing peak stagflationary fears now and this is giving us a reality check on the real costs of the war,” Ludovic Subran, Allianz’s chief economist, said to the Financial Times.
Stagflation is defined as flat economic growth amid rising prices.
At the same time, the COVID virus returned to confront China’s “zero-tolerance” policy, which has locked down the country as well as much of the world’s economy. (See related story in this issue.)
Russia also has begun cutting off gas exports to “unfriendly” European nations (see related story in this issue) and Germany has said a loss of Russian gas could cause the German economy to shrink 5 percent this year.
Meanwhile, Europe is struggling to taper off its purchases of Russian oil.
Last month, the International Monetary Fund cut its forecast for the Eurozone’s growth this year from 4 percent to 2.9 and its outlook for global expansion from 4.4 percent to 3.6.
“The world is in really bad shape, particularly in Europe, where we have entered stagflation,” Erik Nielsen, Unicredit’s chief economic advisor, told the Financial Times.
Europe is poised for a “double whammy,” Nielsen added, as prices continue to rise and the European Central Bank is increasingly likely to raise interest rates as early as July.
TREND FORECAST: The threat, and the approaching reality, is not stagflation but Dragflation, our Top 2022 Trend in which economies contract while prices continue to rise.
The U.S. and Italy already are experiencing Dragflation, based on first-quarter results, as are Ukraine and Russia because of the war. France, Spain, and the rest of the Eurozone are sliding into it as inflation runs uninhibited while the protracted war, Western sanctions, kinked supply lines, crop failures, and other ills drive prices higher and productivity lower.