From bloodletting to remission?

While the 2022 page turns and will remain in the annals in many respects, the main risks that we have been following for several months now will continue to vampirize this new year: war, Covid, the theme inflation / central banks, to which must now be added fears about growth.

The first two risks are exogenous and are at the origin of the new inflationary paradigm in which we find ourselves. They are by nature difficult to predict. On the war in Ukraine, it is very clever to predict the outcome, but the current situation does not suggest any outcome with on the one hand the wishes for the victory of President Zelensky and on the other a Putin who is hard to imagine capitulating and who has also intensified his bombing in recent weeks. The direct consequence is the continued volatility of energy and certain commodity prices.

On Covid, if the main countries seemed to have definitely turned this page, or at least learned to live with it, the situation in China is back on the front of the stage. After having long applied a strict zero-covid strategy, and faced with the rise of protests, Xi Jinping has resolved to drastically return to these constraints with the consequences that could be imagined in a poorly vaccinated country. While the medium/long-term consequences of this decision will unleash growth with a more open economy, accentuated by the fiscal support measures put in place, the short-term situation is more problematic. While we are talking about several hundred million new cases in a few days, the impact on the Chinese economy is immediate. The activity indicators published for the month of December have thus come out in sharp decline and are lower than those of April, during the strict lockdown in Shanghai.

Finally, on the theme of inflation, central bankers do not yet seem ready to loosen the grip of restrictive monetary policy. This is particularly the case in Europe, where two of the ECB’s most hawkish members (Schnabel and Knot) have insisted that rate hikes could continue until next summer.Klaas Knot, the president of the Dutch central bank, went so far as to declare that the ECB “has so far only been halfway there”. If the champions of restrictive monetary policy come to hope for a “flash” recession as a miracle cure for inflation, Joseph Stiglitz, Nobel Prize in Economics 2001, warns, in a recent op-ed, against a mistake in monetary policy: “current inflation is mainly the consequence of supply shortages already being resolved for some. Raising interest rates even further could therefore prove counterproductive” and end up warning of the risk of rising populism in the event of a recession that is too severe. We can only agree with Mr Stiglitz, as the bleeding of monetary policies risks permanently weakening a fragile and changing world economy.

Our first meeting on Monday of the year, whose tone is certainly not optimistic, does not prevent us from wishing you a beautiful and happy new year 2023.

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