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The outlook for the global economy in the coming quarters is characterised by an exceptionally high degree of uncertainty because several sets of issues interact, for each of which different scenarios are conceivable.
From a European perspective, the continuation of the war in Ukraine is of crucial importance. In the best case, a quick pacification of the conflict would not only alleviate the suffering of the people in Ukraine, but also contribute to a normalisation of commodity prices and thus to economic development as a whole. Conversely, a further escalation of the war, especially an embargo on Russian raw materials or a supply stop from the Russian side, would certainly result in a recession in important countries of the currency area, including Germany and Italy, even if the depth of the slump can hardly be reliably estimated.
The global economic outlook is largely determined by the further development of the US economy. While high inflation in Europe is mainly due to higher commodity prices, this is not the most important factor for inflation in the USA. Rather, it is the now very tight labour market there that has led to significant wage growth and thus rising inflationary pressure. Therefore, most observers expect a quick and strong monetary tightening on the part of the Fed, which is thus consciously accepting a reduced growth dynamic of the US economy. However, there is a significant risk that the economy will be slowed down too much and slide into recession. This would also have serious consequences for the euro area. Conversely, however, a positive scenario is also conceivable in which long-term interest rates in the USA do not rise any further, at least not for the time being, the already reduced growth momentum leads to lower wage increases and the Fed possibly raises interest rates less than currently expected.
The third set of issues concerns China, whose economy will hardly grow in the second quarter as a result of the lockdowns in major cities and whose growth target of 5.5 per cent for the current year seems hardly achievable. A continuation of the strict zero-covid policy would not only have potentially disastrous consequences for China itself: The associated supply disruptions would further burden global trade and drive inflation. However, if one assumes that the Chinese leadership takes a rational approach and is able to find a way out of the self-inflicted ideological exaggeration of its own zero-covid policy, a stronger stimulation of its own economy and, as a result, a positive impulse for the global economy would also be conceivable.
Not all combinations of the scenarios outlined here make economic sense. However, there remain so many possibilities with very different economic effects that a very high degree of uncertainty will remain for the time being. This alone is not good news for the global economy, because it slows down consumption and investment.
Chairman of the Board
D-61348 Bad Homburg