HAS In the short term, the war exacerbates the tensions on a productive system already damaged by 2 years of pandemic and reinforces the risk of a hard landing for the world economy: while the latter seemed to be grappling with the threat of stagflation a few weeks, the change in tone of the central banks, faced with the acceleration of inflation, raised the specter of a recession, in particular in the advanced economies.
In this complex environment, Coface downgraded the assessment of 19 countries, including 16 in Europe – United Kingdom, United Kingdom, United Kingdom and United Kingdom in particular – and only 2 revisions to the rise (Brazil and Angola).
At the sectoral level, the number of downward revisions (76 in total against 9 upward revisions) highlights the spread of these successive shocks over all sectors, both those intensive in energy (petrochemicals, metallurgy, paper …) than those more directly linked to the credit cycle (construction).
As the horizon continues to darken, the risks are naturally downside and no scenario can definitely be ruled out.
The slowdown in activity and the risk of stagflation are becoming clearer
Q1 growth figures were released below expectations in most developed economies. In addition, GDP in the euro zone only progressed very slightly for the second consecutive quarter, with in particular a decline of -0.2% in France.
In question, a decline in household consumption in a context of declining purchasing power. Activity also fell in the United States, penalized by foreign trade and the difficulties experienced by the productive sector in rebuilding its stocks.
These figures are all the more worrying as the economic consequences of the war in Ukraine were only just beginning to be felt.
Given the acceleration in inflation, the deterioration in agents’ expectations, and the tightening of global financial conditions, activity in Q2 does not look any better in the advanced economies, and much less favorable in the economies emerging.
While it is probably a little early to confirm that the global economy has entered a regime of stagflation, there are plenty of signals to that effect.
Commodity price pressures set in
While commodity prices have stabilized recently, they remain at very high levels. Thus, the price of oil has never fallen below USD 98 since the start of the war as fears of a potential supply shortfall have remained significant.
This context is favorable to exporters of raw materials and particularly oil.
The only two upward revaluations by Coface thus concern Brazil and Angola, and sectoral reclassifications mainly concern the energy sector of producing countries, while sectoral downgrades target the energy sector in countries where companies are located downstream in the production chain (mainly in Europe).
Similarly, industries whose value chain requires a lot of energy in their production processes, such as paper, chemicals and metallurgy, are seeing their risks reassessed on the rise.
Agribusiness sees the highest number of downgrades this quarter, with nearly every region of the world affected.
Finally, it is likely that companies that had not fully transferred the increase in their production costs to their selling prices will continue to do so.
Thus, price increases will continue in sectors with high pricing power. This is the case of the pharmaceutical sector, made up of a small number of companies that dominate the market throughout the world. Already identified as one of the most resilient, it is the only one with “low risk” ratings in our sector barometer.
Central banks with both feet on the brakes
The ECB has gradually toughened up its rhetoric, enjoining the FED and the Bank of England, even going so far as to pre-announce its future rate hikes.
Like the other major central banks (with the exception of the Bank of Japan), the ECB has no other choice, within the strict framework of its mandate, than that of significantly tightening its guard, even if it means causing a sudden slowdown activity and rekindle fears of a new European sovereign crisis.
In this environment marked by the tightening of credit conditions, the construction sector appears to be one of the most vulnerable.
Rising borrowing costs should be felt in the real estate market and, eventually, in construction activities. This is beginning to be seen in the United States where home sales are declining rapidly.
Clouds gathering for 2023
With the economic and financial environment rapidly deteriorating, Coface downgraded the assessment of 16 countries on the European continent, including all the main economies – with the exception of Italy, already assessed at A4.
Our central scenario suggests, over the next 18 months, a significant slowdown in activity, allowing inflation to slow down very gradually.
Our growth forecasts are particularly poor in advanced countries. The downside risks to the global economy are numerous, while the upside risk to inflation remains.
In order to curb inflation, central banks seem tempted to act so far as to push the economy into recession, which they hope will be more lenient than if prices continue to slide, forcing them to carry out a monetary shock. more violent later.
The risk, which cannot be ruled out, would be that of a decline in demand and the maintenance of high inflation, due to commodity prices which would struggle to settle down due to a chronic shortage of ‘offer.