By Emil Bjerg, journalist and editor of The World Financial Review
In a landscape of intertwining crises, Isabel Schnabel, a Member of the Executive Board of the European Central Bank, has coined the term ‘the Great Volatility’. But new economic forecasts from the European Commissions point towards a relative stabilization of the economy in the EU.
We live in a world that can seem more chaotic than ever: climate change, the pandemic, and internal polarisation. Adding to the global chaos is also what seems to be a new cold war forming between, on the one hand, the Western world with a belief in the rules-based world order, and, on the other hand, an informal alliance of aspiring countries seeking to end decades of Western hegemony. China’s willingness to challenge the US and – especially – Russia’s invasion of Ukraine has shocked the Western world.
The increased and ever-fiercer competition brings a lot of volatility – geopolitically as well as financially. Volatility has been a keyword to describe the time and economies we live in, also in the European Central Bank (ECB), which use that concept to describe a whole new era.
Entering the Great Volatility
According to Isabel Schnabel, Member of the Executive Board of the ECB, we are moving from an era she calls ‘the Great Moderation’ to a period she defines as ‘the Great Volatility’.
According to Schnabel the Great Moderation was characterized by a “period of prosperity and broad macroeconomic stability”.
A number of factors and variables are driving this turn towards volatility as the new normal: climate change is one. The pandemic and the war in Ukraine continue to drive volatility.
Increasing technological and economic competition between the great economies threatens global trade. As Schnabel says: “Today, the world economy is at risk of fracturing into competing security and trade blocs. The international network that connects our economies is fragile. We are witnessing new and alarming forms of protectionism”.
According to El Pais, several global tendencies constitute the Great Volatility: “the re-regionalization of supply chains, the wide use of sanctions, tariffs, energy policy as geopolitical weapons, the fight against climate change”.
This tidal change means that it’s now difficult to say if it’s positive or negative news to the EU bloc when growth in China declines. On the one hand, the two economies are dependent on each other; on the other hand, the competition and rivalry between them seem to grow stronger from year to year.
A positive forecast from the EU
While it was a member of the executive board of the ECB that coined the term ‘the Great Volatility’, the president of the central bank was one of the first to declare that things are stabilizing in the EU. “The news has become much more positive in the last few weeks”
Christine Lagarde, the president of the ECB, said back at the World Economic Forum’s yearly meeting in Davos in late January. And her words are in sync with new numbers from the European Commission.
A recently released forecast from the Commission suggests that inflation is about to shrink to allow greater growth expectations. The forecast predicts growth rates for 2023 of 0.8 percent in EU countries and 0.9 percent in the Eurozone. While those may be low numbers, they’re a significant increase from the 0.3 percent that was the 2023 forecast back in November.
According to the forecast, growth rates will amount to 1.6 percent in the EU in 2024. Inflation levels are overall slowly looking healthier, especially for those who are patient enough to look at 2024. Next year inflation is predicted to get down to 2.8 percent in the EU.
What about that 2023 recession?
While both inflation and growth numbers will continue to look unusual throughout 2023, if the forecast proves correct, we’re already past peak inflation and will avoid a recession.
Christine Lagarde recently remarked about 2023: “It’s not a brilliant year, but it’s a lot better than we have feared”. The relative optimism in the forecast might prove to be a self-fulfilling prophecy: a certain level of consumer resilience and optimism will continue to be instrumental in avoiding negative growth rates.
The European forecast is backed by the late-January forecast from the IMF, which shows a significantly reduced risk of recession globally. Accompanying the forecast, Pierre-Olivier Gourinchas, IMF’s chief economist, recently said: “We are seeing a much lower risk of recession, either globally, or even if we think about the number of countries that might be in recession”.
So what’s driving this relative optimism from the European Commission and IMF?
Factors behind the new-found European optimism
Essential to the optimism is that the European countries are coming out of a winter that was met with a lot of anxiety as gas deliveries from Russia became part of their hybrid warfare.
It’s not too long ago that it was feared that energy rationing would drive up costs to the extent, that European economies would hit a hard recession. In their forecast, the European Commission states that: “The European gas benchmark price has fallen below its pre-war level, helped by a sharp fall in gas consumption and continued diversification of supply sources. With hindsight, the resilience of households and corporations has been impressive”.
While unemployment rates continue to be high in Spain and Greece, the general unemployment rate in the EU was at its all-time low – 6.1 percent – in December 2022 adding to the positive outlook. The low unemployment rate after years of a pandemic and war on the continent is perhaps the best argument that can be made for the expansive fiscal policies that have been implemented since the beginning of the pandemic.
Uncertainties to stifle the joy
It’s still too early to say with certainty that the economy in Europe is back on track: the signals are not unambiguous.
By the beginning of 2023, Germany could report that their economy had – unexpectedly – shrunk in the last quarter of 2022. In Spain and France, inflation increased at the beginning of 2023 after a period of relative normalization towards the end of 2022. When some of the largest economies of Europe face unexpected inflation, that can impact the whole Eurozone. As Jörg Kramer, chief economist in the German Commerzbank recently said to Financial Times: “There are clear upside risks for euro inflation”. On top of this comes that core inflation – inflation levels after excluding volatile items like food, gasoline, and tobacco – remains alarmingly high.
All this adds to the arguments for the ECB to raise the interest rates by yet another half percentage point in March. While the ECB chief economist said that “there’s significant evidence that monetary policy is kicking in”, they want to see drops in inflation “quite a long-lasting period, a fair number of quarters” before cutting interest rates.
On top of that, as mentioned, a variety of sources of volatility continue to threaten the European economies. The war in Ukraine, climate change, and trade wars with new tariffs and sanctions are among possible threats to the near future of the European economies.
Unsurprisingly the aforementioned forecast from the European Commission comes with the disclaimer that “uncertainty surrounding the forecast remains high”. What is certain is that the Great Volatility has come to stay.