Citi: Cuts growth forecasts internationally, launches inflation forecasts – ‘Brake’ in Greece ratings

Of Eleftheria Kourtali

Two years after the pandemic began, another seismic exogenous shock derailed the global economy, Citigroup said in a report on its global outlook today. As a result of the Russia-Ukraine conflict, Citi economists are revising upwards the short-term inflation forecasts in almost every economy they cover, and at a significant rate. Similarly, growth forecasts are revised downwards for almost all countries.

As far as Greece is concerned, the American bank does not give any new forecasts for growth, however, it sees an upward trend for the Greek spreads and a wait-and-see attitude from the rating agencies until there is visibility regarding the effects of the geopolitical crisis on the economy.

The sign of the macroeconomic impact of the Russia-Ukraine conflict has never been questioned, Citi notes. It is a simple negative supply shock, both recessionary and inflationary. But it also leaves many questions unanswered: how big will the impact be? Which parts of the world economy will suffer the most? And perhaps most importantly, how long will the consequences last?

More specifically, the bank reduces its forecasts for global growth for 2022 by 0.6% to 3.3% and its forecasts for 2023 by 0.1% and 3.1%, while increasing its forecasts for global inflation for 2022 significantly by + 1.3% to 6.1% and in 2023 by + 0.4% to 3.4%.

Russia’s invasion of Ukraine is creating new, potentially strong headwinds for the eurozone economy, according to Citi. Trade and financial ties have been limited and have waned since the last crisis of 2014, but the EU now faces the challenge of gaining independence from Russian energy supply as soon as possible. This will require large-scale investment and will make energy more expensive for some time, even if we assume that Russian energy imports will not end immediately. This further reduces household spending power and business competitiveness and – along with new production disruptions and confidence shocks – leads Citi to downgrade its forecast for euro area GDP growth by 1.2% overall. in 2022-2023. For 2022 it now expects growth of 2.3% from 3.3% before and for 2023 it places it at 2.6% from 2.8% before.

The new supply shock will further increase the already increased inflation in the Eurozone. It now expects to move to an average of 6.5% (+ 1.9% compared to before) and 2.7% (+ 0.9%) in 2022 and 2023, respectively, incorporating an increase in its price oil by 30% and a jump of 130% in gas prices. It also raises its expectations for food inflation and expects that disruptions in the supply of goods and higher transport costs will intensify and increase inflation in basic goods.

Citi continues to see wage growth gradually accelerate, to over 3% by the end of the year, due to large increases in the minimum wage (in Germany), the indexation to previous inflation and the tightening of labor markets. However, he also expects inflation to fall below the 2% target again in 2024, as the demand gap and tighter policies will help reduce it.

Further rise of Greek spreads

Amid high inflation, the ECB closes its net asset markets in the third quarter, possibly in August, and is heading for its first interest rate hike this year, most likely in October, according to Citi. The response to fiscal policy continues to grow as governments announce a range of national measures to shield households and businesses, increase defense spending and host refugees. With less support from the ECB, a second EU-wide Recovery Fund is needed to help the weaker members of the euro, but so far it has not been implemented. Without new monetary and fiscal support, the ECB will fail to raise its policy rate above zero (January 2023).

Bond yields are likely to end in 2022 at no higher levels than at present, according to Citi, the region, however, remains vulnerable to another increase in net supply and limited demand from foreign investors. The American bank, in this context, sees an upward trend for the Greek spreads, as well as for the spreads of the rest of the region, with the Italian ones moving at the level of 200-220 basis points by the third quarter of 2023. Citi’s goal for the spread of the Greek bond is placed at 245 basis points in the second quarter, from 225 bp. today, at 260 p.m. in the third quarter, at 270 in the fourth quarter and at 280 p.m. until the third quarter of 2023.

Regarding the house ratings for Greece, on the occasion of the double rating by Moody’s and DBRS this Friday, Citi estimates that there will be a wait-and-see attitude until the landscape is clear about the effects that the war will have on Ukraine in the size of the Greek economy.