Forecasts
As Yogi Berra’s quote reminds us, making forecasts is a challenge, especially about the future.
As a result of the energy price shock, inflation is likely to prove higher for longer, everywhere, and real economic growth slower.
Inflation expectations in 2022 have increased from around 2% towards 7% over recent months, and are likely to climb further once the recent energy price spike is factored into forecasts.
Source: Bloomberg, Artorius
For energy importers, especially those who rely most directly on Russian supplies, the combination of sanctions and spiralling prices will slow growth, even while the post-COVID rebound continues. Europe is the most obvious instance, with large parts of the Eurozone closely integrated into Russian supply chains. It is plausible, therefore, that European economies experience a sharper slowdown in the middle quarters of 2022. It is very hard to quantify the size of any such effect, especially when GDP data is still distorted by pandemic effects, but it is not unreasonable to postulate a stall in growth in Q2 and Q3 in Europe. Other areas, the US for example, should be less impacted but higher energy prices and any war-related dent to sentiment could still slow growth moderately in coming quarters.
To some extent, economists continue to play catch up with reality, and European and UK economic growth forecasts are likely to be cut further in coming weeks.
Forecasts for economic growth in 2022 are likely to continue to be cut further.
Source: Bloomberg, Artorius
Whilst the mix of higher inflation and lower economic growth is seen as bad, nominal economic growth (which is the combination of inflation and real economic growth) will remain at a high pace. This matters for investors as corporate profits tend to track nominal economic growth rather than real economic growth.