Along with the consequences of the war in Ukraine, the aggressive tightening of monetary policy worldwide and persistent inflation outline a gloomy outlook for the development of economies. In the short term, a regime of stagflation has been established, where there is almost no growth and prices are rising rapidly. Meanwhile, the prospect of a global recession is becoming increasingly real.
In this regard, the credit experts from „Cofas“ made an economic assessment of GDP growth, the development of individual countries and sectors. The analysis points to downgrades in 49 sector ratings that are sensitive to the economic cycle. Among them are the construction, metallurgy, wood and chemical industries in different geographical regions.
Given the aforementioned global trends, Cofas has revised its forecasts for global growth next year to below 2%, as it was in 2001, 2008, 2009 and 2020. While forecasts were drawn to the downside for all regions of the world, Europe is the one whose outlook has worsened the most. The energy crisis is deepening and the Old Continent is preparing for new measures. Whether it is a „voluntary“ reduction in consumption /suspension of activities that are unprofitable due to energy costs/ or the imposition of norms by governments, this will certainly lead to a decrease in production and a decline in gross domestic product. Plamen Dimitrov, manager of Kofas Bulgaria, said:
“In Bulgaria, the situation is even more unstable given the political and social risks that we have been observing for months now. We at Kofas do not evaluate the implementation of certain policies, but we monitor and analyze their results. Based on this, I can say that the energy uncertainty in the country will definitely have a negative impact on business in the coming months, and the effects will be felt even in 2023.”
The past few months have seen persistently high and increasingly widespread inflation in developed and emerging economies. In this environment, central banks remain decidedly hawkish, and most of them have returned to levels of key interest rates not seen in the last decade. For example, this summer the Federal Reserve raised its key interest rate three times in a row by 75 basis points. This aggressiveness leads to an increased tightening of monetary policy in other countries /especially in those with emerging markets/ in order to stop the depreciation of their currencies against the US dollar. Such tightening of monetary and financial conditions, if continued at current rates, will threaten global growth and financial stability.
But something more – it darkens the prospects for the global construction sector. Industrial metals and timber prices have fallen steadily in recent months, down 20% and 60% respectively since the start of the year, prompting Cofas experts to downgrade these sectors in several geographies.
Although central banks are determined to fight inflation with all possible mechanisms, many of them face a conflict of objectives with the fiscal policy of their country/region. National governments, struggling against the contraction in activity, have indeed increased the number of measures to support the purchasing power of households and the cash flows of businesses. The result will be a potentially large risk to public finances – an increase in the public deficit and a sharp rise in financing costs.
