SEB economic forecast: war and inflation threaten economic growth

2022 will be a challenging year for the global economy
Russia’s attack on Ukraine has caused immeasurable human suffering, but the war has broader economic consequences for the entire world. Inflation, which has already picked up steam, is gaining momentum as a result of rising raw material prices. Both Russia and Ukraine have previously been very important exporters of agricultural products. The boycott of Russian oil and gas has once again led to a further increase in energy prices. The coronavirus – the outbreaks of which are being suppressed with strong constraints in China – has not disappeared from the world, which in turn is causing ongoing glitches in global supply chains.
 
Interest rates are rising
Despite the difficult situation in the economy, almost all major central banks have already raised interest rates or are about to do so. This is caused by inflation that has become too high and broad-based. If central banks do not act, there is a high risk that long-term inflation expectations will also soar into the sky. The seriousness of the situation is underlined by the fact that for the first time since 2011, the European Central Bank is intending to raise interest rates and will start to do so in July.
 
The main scenario is still a soft landing
In light of the above, the question is therefore not whether growth will slow, but by how much? Will central banks and governments be able to balance the economy or are we on the path to a deep recession? This is a complex and uncertain process, but our main scenario is that a soft landing is likely despite everything. Demand and labor markets remain strong in most major economies, many businesses are doing well and households have accumulated substantial savings. However, soft balancing in the economy is not easy, and history offers many examples of central banks that went too far or too fast.
 
Estonian export remains strong
The pace of growth of the Estonian economy this year will be determined by the performance of the euro area, especially our main trading partners. According to the forecast by SEB, GDP in the euro area will grow by 2.2% in 2022, with the GDP of both Finland and Sweden growing by 1.8%. If these forecasts hold, it is hard to believe that this year will lead to insurmountable setbacks for us. Economic surveys and statistics so far show that there is still a strong demand for goods from the exporting industry. Services exports are being held back by a decline in Russian transit volumes, but IT services sales were already close to exceeding the export turnover of transport and warehousing services last year.
 
The biggest challenge this year will be very high inflation
Price increases in recent months have been alarmingly high. Although price increases will start to recede in the coming months due to the higher reference base last year, average inflation in 2022 will still reach 13%, the highest increase in the CPI since the mid-1990s.
 
Despite rapid inflation, household consumption stays strong
The strong growth in domestic consumption in the first half of this year has been surprising and a sign of continued strong household income growth and high confidence. However, in the coming months inflation will start to make adjustments in behavior and consumption growth will slow down sharply. According to SEB’s forecast, private consumption will increase by only 0.8% in constant prices this year.
 
Estonia’s economic growth this year will be meagre
Due to very high inflation, Estonia’s GDP will increase by only 0.6% in constant prices in 2022. At the same time, stagnation may not be perceived by economic operators, as nominal economic growth, measured in euros, is still very rapid, which increases both corporate turnover and employee pay numbers. Just as quickly as the money reaches the account, it tends to be used up due to rising prices. Inflation is expected to ease in 2023, which is why the real growth figure can also be higher based on SEB’s forecast. However, it will be limited to 2.0%, due to more subdued demand than in previous years, but also because of supply-side bottlenecks.
 
Mihkel Nestor
Economic Analyst, SEB
 
The latest economic forecast from SEB can be found in more detail here
 
More information:
 
Katre Kärner
Communications Manager
Business client area
SEB Bank
 
Phone +372-5560-9962 
Tornimäe 2, 15010 Tallinn
katre.karner@seb.ee  
www.seb.ee