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By Dr. Arun Singh,
Global Chief Economist,
Dun & Bradstreet

21stJune 2022

Recession Risks Increase

 

Commentary:

“Recession risks rise as the global economy potentially faces a prolonged period of anaemic growth and elevated inflation. Growth prospects for 2022 are weakening amid rising global political and insecurity risks, as consumers grapple with higher prices of essential goods. Uncertainty related to food and energy supply is a major risk to stable governance, especially for lower-income import-dependent economies.India’s growth is also expected to moderate; however, the extent of slowdown will depend on the strengthening of global headwinds as the domestic economy continues to remain resilient,” said Dr Arun Singh, Global Chief Economist, Dun & Bradstreet.

Introduction

The US economy contracted by 1.6% in the first quarter on the back of a decrease in exports, lower government spending at the federal, state and local levels and a decline in private inventory investment. Continued aggressive monetary tightening by the US Federal Reserve will contribute to slowing growth and rising unemployment in H2 as it seeks to re-anchor long-term inflation expectations. Headline inflation surged to 8.6% y/y in May, with broad-based price increases led by gas, food, and housing. As a result, our real GDP forecast for 2022 was revised down to 2.3% as resilient price pressures and tighter financial conditions dent consumer and business sentiment.

In 2020, China averted the collapse of economic activity experienced in Europe and North America, making it the only large economy to avoid a pandemic-induced recession. While export manufacturing expanded in 2021, economic growth began cooling in the second half of the year due to fresh waves of Covid-19 which hit consumption and services; this extended into 2022. Weakness in the property sector, a key driver of past economic growth, and geopolitics were other major contributors to decelerated economic activity. Despite deployment of policy support by the Chinese government, the economy will grow more slowly through end-2023 compared to the previous decade.

In the United Kingdom, consumer demand is likely to slow down in the near-term, increasing the likelihood of a contraction in H2 2022, as the economy fails to generate growth and high inflation squeezes real incomes. Notably, Brexit might be acting as a shock amplifier, pushing core inflation higher than in European counterparts. GDP dropped for two consecutive months (April and May 2022) for the first time since the pandemic began in 2020. Although the readings are heavily affected by the end of the government's Covid-19 test-and-trace programme, excluding this effect shows that the UK economy has not been growing in recent months.

The international environment for cross-border investment - weakened by the ongoing war in Ukraine - is set to deteriorate this year with the rising probability of recessions across various geographical regions. Tightening global financial conditions combined with elevated political and insecurity risks in developing economies - fueled by stubbornly high food and energy prices - will likely have negative effects on investment flows in 2022 as uncertainty remains high

GLOBAL OUTLOOK: EASTERN EUROPE AND CENTRAL ASIA’S OUTLOOK IS DETERIORATING

The Russian economy will struggle to recover from the deep recession into which it has entered. The Ukrainian economy is expected to contract by 40% - 45% in 2022. With Western nations imposing further sanctions, including embargoes on Russian oil, regional trade relations will be altered for the long term. The war is also creating a food crisis for the region along with much of Europe.

Other regional countries are also experiencing severe supply-chain disruptions with far-reaching effects due to heavy Russian dependency. We see regional risk escalating further with Europe indicating the curtailment of up to 90% of Russian oil, which could bring difficult choices ahead for many nations in the region. EECA economies are also grappling with mounting debt-burden, high inflation, rising interest rates, decelerating growth, and extreme currency fluctuations.

 

Dun & Bradstreet Country Risk Analysis

Country

June 2022

July 2022

Change

Country Risk Rating Upgrades (risk level has improved)

None

Country Risk Rating Downgrades (risk level has deteriorated)

None

Outlook Trend Upgrades (from/to)

None

Outlook Trend Downgrades (from/to)

Ireland

Stable

Deteriorating

 

REGIONAL SUMMARIES

 

North America

Re-anchoring long-term inflation expectations is a key objective of the US Fed which will continue aggressive tightening after hiking its policy rate by 75bps in June – the most since 1994. Elevated global prices are a boon for Canada's energy and wheat industries; however, private consumption will be cooled by monetary tightening in the coming months.

 

Western and Central Europe

Facing growing inflationary pressures, the ECB announced an imminent rate hike at a moment when its inflation-activity trade-off is exacerbated by widening sovereign spreads between euro area economies. A more hawkish Bank of England responds to rising inflation (expectations) by hiking rates for the fifth time since December 2021.

 

The Nordics

The outlook for the Nordic economies has been deteriorating due to effects caused by the Russia-Ukraine crisis, supply-chain issues, rising inflation caused by high energy and food prices and significant growth slowdown forcing central banks to aggressively resort to monetary-tightening measures.

 

Asia Pacific

The outlook is retained as ‘deteriorating’. Despite resilient exports, growth prospects weakened with intensifying inflationary pressures and rising risks to global economic heavyweights: the US, China, and the EU. More rate hikes are likely and that will put Japan and China in even sharper contrast on monetary policy, with the risk of financial volatility intact.

 

Latin America & Caribbean

The global squeeze on grain and energy supplies boosts regional exporters’ receipts. However, recession risks are rising as regional central banks - including those in Brazil, Peru, Chile, Mexico, and Colombia - curb credit demand and reduce growth prospects for the coming months.

 

Eastern Europe & Central Asia

The outlook remains at 'deteriorating rapidly' due to economic uncertainty and disruptions caused by the Russia-Ukraine war. Russia, Ukraine, and Belarus are set to record severe economic downturn with extended recovery periods. High energy and commodity prices, weakened economic outlook, and mounting debt are key regional risks.

 

Middle East & North Africa

There remain serious concerns over food security in smaller countries in the Levant and North Africa where bread is a major component of the staple diet. Inflation has picked up in the region due to pass through of higher commodity prices, especially food and energy, and supply chain disruptions. Oil exporters are continuing to benefit from higher oil prices.

 

Sub-Saharan Africa

Inflationary pressures in Sub-Saharan Africa are increasing, especially for fuel and food items. Higher prices for oil as well as non-oil commodities are a positive for commodity exporters. But there is a significant threat to wheat exports from Russia and Ukraine, which account for nearly 29% of the global supply.

 

Dun & Bradstreet Risk Indicator

Dun & Bradstreet’s Country Risk Indicator provides a comparative, cross-border assessment of the risk of doing business in a country. The risk indicator is divided into seven bands, ranging from DB1 to DB7 – DB1 is lowest risk, DB7 is highest risk. Each band is subdivided into quartiles (a-d), with ‘a’ representing slightly less risk than ‘b’ (and so on). Only the DB7 indicator is not divided into quartiles.

The individual DB risk indicators denote the following degrees of risk:

 

Ratings and Outlook Changes:

Ratings changes:Changes in rating are made when we judge that there has been a significant alteration in a country’s overall circumstances – this could stem from a one-off event (e.g. a major natural disaster) or from a change in something structural/cyclical (e.g. an important shift in growth prospects). An upgrade indicates a significant change for the better, a downgrade a significant change for the worse. The number of quartiles of change indicates the extent of the improvement/deterioration in circumstances.

Outlook changes:The outlook trend indicates whether we think a country’s next rating change is likely to be a downgrade (‘Deteriorating’ trend) or an upgrade (‘Improving’ trend). A ‘Stable’ outlook trend indicates that we do not currently anticipate a rating change in the near future.

 

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