Global Growth Outlook Ebbs Amid Ukraine War, China Slowdown

While service businesses are benefiting as Covid-19 restrictions are removed and households spend some of the savings they amassed during the pandemic, manufacturing firms are wrestling with higher prices and supply-chain disruptions.

The war in Ukraine dealt a stagflationary blow as the global economy was rebounding strongly, though unevenly, from the shock of the pandemic. The rapid recovery, bolstered by aggressive fiscal and monetary stimulus, has driven down unemployment in advanced economies while adding to pressure on global supply chains strained by intermittent Covid-19 outbreaks. All that has pushed inflation to the highest levels in several decades on both sides of the Atlantic.

In Germany, Europe’s largest economy and a manufacturing powerhouse, growth slowed to a three-month low in April, according to surveys by S&P Global out Friday. The first fall in manufacturing output since June 2020 offset an acceleration of service-sector growth to the fastest pace since August. The autos sector was particularly hard hit, recording a steepening and marked loss of output, the surveys found.

Still, the surveys pointed to solid growth overall in the 19-nation eurozone. That could encourage the European Central Bank to move ahead with aggressive interest-rate increases aimed at containing skyrocketing inflation, economists said. ECB officials have signaled that they could start to increase rates as soon as July.

Such moves add to headwinds that are ricocheting through global financial markets and weighing on asset prices. Borrowing costs are already rising sharply around the world as investors anticipate rate rises from the Federal Reserve and other major central banks.

The International Monetary Fund reduced Tuesday its forecast for global economic growth this year by nearly a percentage point, warning that the war in Ukraine was adding to the economic strains wrought by the pandemic. The institution warned that recent lockdowns in key manufacturing and trade hubs in China would likely compound supply disruptions elsewhere.

China’s zero-tolerance approach to Covid-19 is battering consumer spending and hurting industrial production in an economy grappling with a real estate crunch and a regulatory crackdown on industries including technology and education.

“What we see in China is that consumption is falling short; it is not recovering as strongly as necessary,” IMF Managing Director Kristalina Georgieva said Wednesday.

Germany’s Bayerische Motoren Werke AG said that its global sales declined by about 6% in the first quarter versus the same period a year earlier. BMW blamed “the geopolitical situation in Eastern Europe and the Covid lockdowns in China.”

Rolf Breidenbach, chief executive of German auto supplier Hella GmbH & Co. KGaA, said, “There are still massive supply shortages for certain electronic components and materials and the development of the coronavirus pandemic also continues to give rise to significant risks, especially in the Chinese market.”

“It can be assumed that the rise in prices, especially for raw and other materials, energy and logistics, will be ongoing,” he added.

Germany’s Bundesbank warned Friday that an embargo on Russian energy imports would reduce the nation’s economic output by about 5% this year, triggering a recession and a further rise in inflation. European officials are currently discussing plans to phase out Russian oil imports. Germany buys more than half its natural-gas imports from Russia.

In the U.K., the S&P Global surveys pointed to a marked cooling in the pace of economic growth in April. Businesses said rising living costs and economic uncertainty arising from the war in Ukraine had impacted client demand. Business optimism declined to the lowest since October 2020.

“Firms are taking a more cautious approach to hiring and spending as demand cools and the outlook becomes gloomier, to suggest that the slowdown in the economy has further to run,” said Chris Williamson, chief business economist at S&P Global.

U.K. retail sales fell by an unexpected 1.4% in March, according to official data published Friday, while consumer confidence sank to the second-lowest on record in April.

“The U.K. is teetering on the edge of a recession and that’s before inflation hits 8% or higher later this year,” said Emma-Lou Montgomery, associate director at Fidelity International.

In France, growth picked up to the strongest level since January 2018, as a modest uptick in factory output was accompanied by the largest surge in services activity since the start of that year, S&P Global said. France’s economy is less reliant than Germany’s on manufacturing and on Russian energy.

French cosmetics company L’Oréal SA reported a nearly one-fifth on-the-year increase in quarterly revenue to about 9.1 billion euros, equivalent to around $9.9 billion, driven in particular by sales in North America. Fashion label Hermès International S.C.A. reported a roughly one-third increase in revenue for the same period, to about €2.8 billion.

“Despite the record drop in real wages, consumers still seem eager to spend some of their savings built up during the lockdowns now that restrictions have eased,” said Bert Colijn, an economist with ING Bank.

For the eurozone as a whole, growth accelerated in April and hiring picked up. Business activity among service providers rose at the fastest rate since August, led by a boom in tourism and recreation activity. Virus-containment measures across the eurozone were the most relaxed in April since the start of the pandemic, according to S&P Global.

Analysts warned, however, that services activity would likely slow over the coming months as high inflation weighed on consumer spending, potentially creating a stagflationary environment of high inflation and near-zero growth.

“Given how rampant inflation is at present, it’s difficult to see sustained postpandemic recovery efforts offsetting the negative impact from rising prices,” said Joe Hayes, an economist with S&P Global.

In Australia and Japan, surveys pointed to stronger growth, but business confidence declined amid concerns over rising costs.

“I think the official numbers actually understate the true magnitude of inflation,” Tesla Chief Executive Elon Musk said. “Inflation appears to be likely to continue for at least the remainder of this year…in some cases, we’re seeing suppliers request 20% to 30% cost increases for parts from last year to the end of this year.”

Write to Tom Fairless at [email protected]