Editions

According to the KOF Economic Forecast, the global economy will not pick up speed again until the second half of the year. The loss of household purchasing power caused by the high inflation rates of the past two years will dampen private consumption in the short term. In addition, the more challenging funding conditions and the high level of political uncertainty are weighing on investment momentum in many countries.

The energy crisis has turned out to be less severe than feared – partly thanks to the mild winter. However, high inflation, rising interest rates and geopolitical risks continue to weigh on the global economy. This situation is compounded by the risk of disruption in the banking sector.

KOF economist Heiner Mikosch, Head of the International Business Cycle Section, talks about the economic dangers for Europe and Switzerland posed by Russia’s attack on Ukraine.

Now that the pandemic is largely under control in most advanced economies, economic momentum is also picking up again worldwide. The United States in particular is living up to its reputation as the locomotive of the global economy thanks to massive government stimulus. However, there is a growing danger that the US economy will overheat in the medium term.

While the economies of China and the United States have already rebounded significantly from the coronavirus pandemic, the recovery in Europe has been sluggish. From the second quarter onwards, however, KOF expects this recovery to progress in Europe as well thanks to the vaccination campaigns and a slight easing of restrictions.

Many companies hope that the Chinese infrastructure project will bring them new business opportunities, among them also Swiss companies. While the associated economic potential is enormous, so are the uncertainties and challenges. An overview in four points.

The global economy is in excellent condition, with global trade expanding at an above-average rate for the first time in five years. However, KOF anticipates a slight decline in global dynamics in the coming months.

The second of three articles on Eurozone debt is dedicated to the financial sector. During the crisis years, many financial firms were criticised, inter alia, for their dependency on public support measures. Since then, a few changes have been introduced in the currency union’s institutional regulations, and systemic risks have been reduced in many countries, albeit not in all of them.

The first of three articles on Eurozone debt focuses on government budgets. Since the debt crisis, the Eurozone member states have significantly reduced new borrowing, with the deficit-to-GDP ratio – a key convergence criterion under the Maastricht Treaty – falling steadily from over 6% in 2010 to just above 1% last year. However, consolidation efforts are on the decline again.

The world economy is on a positive path. For the time being, the global economic upswing is likely to continue until it will gradually slow down once China phases out its fiscal stimulus programme. The financial system has become more robust and the risk of a new financial crisis is limited.

The financial crisis years have made it clear that the labour markets in many eurozone countries were too rigid to adjust to unexpected macroeconomic changes. As a consequence, the eurozone temporarily lost more than five million jobs and unemployment persistently remained above 10 per cent for a long time. Various structural adjustments combined with the economic recovery have led to an improvement of the labour market situation since 2013.

The global economy has been growing substantially for over a year now. The tempo even accelerated in the second quarter of 2017. Growth rates in the USA, Japan and the Eurozone significantly exceeded the potential. In the USA, the economy is close to full capacity, in Japan already above. In contrast, the production gap has not yet closed in the Eurozone. The Chinese economy is slowly passing the peak of its boom.

Nighttime lights data captured by satellites can provide useful information regarding the current economic activity across countries and regions, and also for the prediction of future developments. In a recently published KOF Working Paper, Jaqueson K. Galimberti presents his latest research and promising results favouring the use of this innovative source of data for macroeconomic measurement and forecasting.

Recently, inflation rates in the eurozone have picked up again. Nevertheless, the core inflation rate remains low. To get a better understanding of the inflation dynamics, KOF has developed an inflation model, which shows that the inflation trend in the past few years was predominantly affected by the decline in oil prices. In the course of the eurozone’s economic recovery and the lapse of the second-round effects of the drop in energy prices, the core inflation rate is likely to rise again.

In the past year, macroeconomic production in the eurozone expanded by 1.7%, giving Europe a growth edge over the USA for the first time since 2008.

Since the surprising outcome of the US election there has been uncertainty about Trump’s future actions as president. His policies include trade negotiations with a more protectionist stance, immigration controls, tax cuts, financial deregulation, a reduced government presence in health insurance, higher spending on infrastructure, and an energy policy favouring fossil fuels. As we wait for further clarity about the implementation of his economic policy agenda, its main aspects are reviewed below.

World trade has only been recording moderate growth in recent times. This article will consider the reasons for the lack of dynamism.