To assume that the worst is necessarily likely is not enough. We must only recognize the difficulty of seeing clearly in a context characterized above all by many unknowns.
By invading Ukraine on February 24, V. Putin, in addition to so many devastating effects, promoted the return of hard times for the global economy. While the figures published so far point to good overall activity in the different regions of the world in 2022, the Kremlin ruler cast doubts on future economic developments and advocated a return to the forefront of macroeconomics as a important determinant of the behavior of financial assets.
The erratic movements of this over the past four weeks reflect on the one hand the difficulty for operators to get a sense of the evolution of the short-term situation, but also of the contours of one economic world order that will inevitably emerge from the other in the medium term. Rarely in forty years has economic visibility been so murky!
In such a context, it’s hard not to be afraid, especially when the price of a barrel suddenly surges to $135 a barrel, like two weeks ago. Moreover, the return of the latter’s prices below the $100 mark last week demonstrates how difficult it is to make economic forecasts in such a chaotic context.
Recession risk must necessarily be revised upwards.
Admittedly, the risk of stagflation has increased in the past month. In the same way, that of a recession must necessarily be adjusted upwards. In fact, we might think that at the height of the market decline in recent weeks, operators had turned a recession into a largely likely scenario, especially in Europe.
The shock of the Ukrainian invasion is certainly profound and its reality is sadly unquestionable, which should encourage caution in economic forecasting; on the other hand, it is also necessary to know how to recognize that absolute pessimism is a dangerous option with regard to the many moving variables to be integrated into the equation. The above example of the erratic movements in oil prices – which could also extend to the entire energy sphere – is not unique. Can a diplomatic solution to the crisis be ruled out in a relatively short period of time? The answer is far from simple, which does not mean it is positive per se. After brandishing the nuclear threat at the outset of his aggression, can V. Putin still escalate the conflict, or are we “simply” moving towards a local, long and sharp conflict?
Will Europe, which has shown “amazing” union in managing the crisis, give itself the financial means for its energy independence strategy and its desire for common defence? This would not be without budgetary implications and could bolster the communal bond issuances initiated in the wake of the covid-19 crisis. Overall, European fiscal activism is strengthening and can be an important support to avoid the worst-case economic scenarios in the near term, in the context of a policy of safeguarding purchasing power, a concern that is becoming more apparent by the day. Can monetary policy ignore geopolitical developments and continue on the path that was emerging just over a month ago? Recent decisions by the Federal Reserve and statements by members of the ECB Council seem to point in this direction. Is the path thus traced immutable? Nothing is certain, especially if commodity prices stabilize at high levels, but avoid approaching the highs seen in the immediate aftermath of the Russian troops’ invasion of Ukraine.
A world of dissociated blocs that is much less globalized in terms of human, economic and financial flows is not an absurd hypothesis.
We could go on to explain the unknowns that now mark the course of the global economic cycle. This would only reinforce the sense of confusion – in the sense of obscure and ambiguous elements – that affects everyone’s judgment in determining an economic and financial scenario.
And again, it is without counting on the questions related to the new world order that will surely arise at the end of this war. A world of dissociated blocs that is much less globalized in terms of human, economic and financial flows is not an absurd hypothesis. Will such an environment be more inflationary than the one we’ve known for 40 years? Presumably. Is it characterized by less growth? Not necessarily, but the distribution of the latter could be permanently affected, if only because of the expressed desire to strengthen the movement of “regionalization” of production chains that had already brought the covid-19 crisis back to the forefront.
The “Time of Troubles” and Its False Tsars is one of the darkest pages in Russian history with its share of human dramas. The global economy is currently facing challenges of a different nature: we are dealing with a clear lack of visibility that makes it difficult to determine economic prospects for both the short and medium term.
Sure, a lot of things are trite compared to what might be considered probable at the start of the year. On the other hand, assuming that the worst is necessarily probable makes no more sense than recognizing that it is difficult to see things clearly in a context characterized mainly by many unknowns.