Global Economic Outlook H1'22

• Russia-Ukraine war to lower global growth prospects and increase inflationary pressures
• Central banks’ change in policy stance could add to markets’ volatility
• On-going geopolitical uncertainties could see further disruptions to production and trade

The on-going conflict in Ukraine is set to lower global growth prospects and increase inflationary pressures across the world, according to the latest KPMG Global Economic Outlook.

The bi-annual report provides economic forecasts and analysis from the global organization’s team of economists in territories and regions throughout the world.

The latest edition, covering H1’2022, warns progress on global issues including public health and climate change has slowed as political and business leaders grapple with the broad implications of the war in Ukraine.

While Russia and Ukraine together represent a relatively small part of the world economy, both countries account for a large share of global energy exports, as well as exports of a range of metals, food staples and agricultural inputs. Together, Russia and Ukraine account for almost a third of global wheat exports.

The global economy emerged from the COVID-19 recession with higher public debt and as central banks raise interest rates, the servicing cost of sovereign debt also increases, making it particularly challenging for emerging countries whose debt is denominated in an appreciating US dollar. With policymakers and many businesses still reeling from the consequences of the pandemic, they are less ready to counter another significant economic shock.

The outlook for the next two years will depend on how the conflict between Russia and Ukraine evolves. With so much uncertainty at present, KPMG’s Global Economic Outlook has developed three scenarios to examine the prospects for the world economy:

• The main scenario assumes that world oil prices will be US$30 higher than their path prior to the escalation of the crisis, while gas prices will be 50% higher across Europe. It also incorporates a 5% rise in global food prices.
• A more severe scenario looks at the potential impact with world oil prices US$40 higher together with a 100% rise in gas prices for Europe and 50% rise in gas prices for the rest of the world. This downside scenario also assumes a 10% rise in global food prices. Both scenarios incorporate a 23% rise in average metal prices and a 4% increase in the cost of agricultural inputs. They also include higher investment risk premia and additional government spending in Europe.
• The report’s upside scenario looks at the possible outcome should the conflict resolve sooner than anticipated, with prices returning to early February levels and production and trade flows restored.

The report’s analysis found that global GDP growth could range between 3.3% to 4% this year and between 2.5% to 3.2% in 2023, depending on the scenario.

Risks to KPMG’s forecast are currently skewed to the downside. It is possible to envisage that the conflict between Russia and Ukraine escalates beyond the report’s downside scenario, with cuts to energy supplies for example causing a significant disruption to production in parts of Europe. The COVID-19 pandemic is still causing shutdowns in major economies such as China, and a new wave could undo the progress in easing global supply chain blockages.

Inflation is picking up across the ASEAN region in part driven by the easing of Monetary Policy during the pandemic. But unlike other parts of the world, momentum in prices is still relatively low. Consumer price inflation in Indonesia, Malaysia, Thailand and Vietnam is currently sitting between 2% and 3%. Fiscal supports through the pandemic were generally smaller, resulting in a slower recovery in domestic demand and more muted local inflationary pressures. However, Singapore — where government support has been more significant — is an exception, with inflation currently at a high of 4%, not seen since 2013.

The recent rises in food and fuel prices will impact the region. A significant portion of wheat imports (to Indonesia and Philippines, in particular) are sourced from Russia and Ukraine. Additionally, agriculture in the region is also heavily reliant on Russia and Belarus for potassic fertiliser. The adverse impacts of higher fuel prices are, however, partially offset in commodity-producing economies such as Indonesia and Malaysia through higher government revenues.

The Russian-Ukrainian conflict is also set to disrupt manufacturing supply chains, as a result of shortages in key inputs such as neon and semi-finished iron and steel, which are essential for the production of chips (neon) and cars, machinery and electronics (steel).

In some countries, such as Indonesia and Singapore, attention has started to shift towards fiscal consolidation with the announcement of tax increases as initial signs of economic recovery emerge. This will slow growth momentum going through H2' 2022 and 2023, as will the exhausting of the easy wins from re-opening, which will take the pace of growth in many countries back towards long-run trend rates.