International news: Global economic recovery weakens, but investors seem to have taken the hit

The war in Ukraine, high inflation and a slowdown in the Chinese economy are holding back activity. But the world’s major stock exchanges are back to where they were before the Russian invasion.

The war in Ukraine has dominated international news since the Russian invasion on Feb. 24, but investors remember Covid-19 fondly. The Omicron variant has caused numerous outbreaks in China in recent months. The government tightened containment measures in the northeast of the country on March 20 following the outbreak, particularly in Jilin Province, which borders North Korea and Russia.

The city of Shenzhen, located at the gates of Hong Kong, locked down its 17.5 million residents on March 14 before the agglomeration, which is home to many factories, eased certain restrictions a few days later.

Thus, China remains true to its “zero Covid” policy, which is to do everything possible to prevent new cases. But these policies cause a shutdown of operations and hinder growth by creating gaps in supply chains with each local population’s confinement.

inflationary shock

The sharp rise in prices for energy and raw materials in general, caused by the war in Ukraine, has led to a high level of inflation, which can now be maintained for a long time. According to INSEE, prices rose 3.6% in February in France, and about 5% are expected in the second quarter.

In the euro area, it has already reached 6%. “This imported inflation risks turning into autonomous inflation,” warns Mathieu Plein, deputy director of OFCE’s Analysis and Forecasting Division.

Thus, the war in Ukraine and the slowdown in China are affecting global economic activity. In France, INSEE forecasts a one-point decline in GDP growth this year. From 4%, it will rise to 3% in 2022, or even 2.5% if the Omicron variant continues to grow in China. An inflationary shock will hit the purchasing power of Europeans, who will tend to consume less.

Threats of stagflation

To meet these threats, which can lead to stagflation, comes the tightening of monetary policy in the United States with an increase in the Fed’s key interest rate. In the euro area, the end of the ECB’s asset purchases confirms the desire to curb inflation before a possible increase in the key rate, when the situation allows.

In the bond markets, rates on 10-year bonds continued to rise, to 2.35% in the US on March 22 and 0.9% for the French OAT. Thus, financing conditions for households and businesses will worsen.

Stock market recovery

In this unfavorable macroeconomic context, the major Western stock markets nevertheless appear to have been shocked in recent weeks. On March 22, the CAC 40 almost recovered to 6660 points from the 6690 level seen the day before the Russian invasion on February 24, ie. a decline of just 2.4% over the period after a higher annual rate of 7384 points. 5 January. On Wall Street, the S&P 500 rose above the February 23 level.

The investment professionals we spoke to no longer seem as worried as the man on the street who saw disturbing footage of the conflict in Ukraine. They note the absence of a total embargo on Russian oil and gas, the absence of military support for Russia from China – so far. The conflict remains geographically limited and NATO will not intervene directly. Therefore, investors do not approve of the worst-case scenario. And they believe that the big Western central banks will eventually get this spike in inflation under control.

The situation, of course, can change at any moment if the conflict in Ukraine is reborn. But the credible prospect of a ceasefire could, on the contrary, trigger a more pronounced recovery in the stock market.

Tens of millions of Chinese are currently in detention across the country. Local lockdowns are hurting the post-coronavirus recovery and exacerbating the detrimental impact of the war in Ukraine on global growth.

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