9 March 2022 Line

Geopolitics have become the biggest threat to growth

Helge J. Pedersen is Group Chief Economist in Nordea, and he is one of the keynote speakers at the conference Cash & Treasury Management 1st of september. At the conference he will give a presentation on the current and future threats in the cash & treasury landscape.

You can read an article with Helge J. Pedersen.

We are finally putting the pandemic behind us

This should give rise to optimism about the economic upturn, which will be further supported by the green transition. But at the same time other and new challenges are piling up. These challenges are not least associated with high inflation and the major geopolitical tensions which are currently unfolding between Russia on one side and Ukraine and the West on the other. It is a war which is fought by armed forces, economic measures and in cyberspace and which is currently posing by far the greatest risks to the growth outlook this year and next.

This is especially because it prompts renewed fear and uncertainty affecting households, businesses and financial markets, but also because it adds fuel to the already record-high inflation. In both the US and Europe inflation has risen to the highest level in almost 40 years!

Inflation is driven partly by strong global demand for goods and capital goods, which has pushed commodity and materials prices higher, and partly by the supply side, which has been hit by logistics problems in international shipping and a breakdown of global value chains due to the pandemic. Moreover, energy prices in Europe have skyrocketed at a time when production of renewable energy has declined due to dry and windless weather, gas inventories are historically low and nuclear power plants are being decommissioned in Germany.

This has left Europe in an energy crisis which at some point will be resolved, although the timing is hard to predict especially because of the significant issues at stake for the EU, the US and Russia. As a consequence of Russia’s invasion of Ukraine, Germany has announced that it will halt the otherwise very important new gas pipeline from Russia to Germany, Nord Stream 2. This leaves Europe in a vulnerable situation unless alternative suppliers are found – especially before the autumn when inventories need to be filled for the winter season. This may ultimately have a significant impact on growth prospects for the European economy.

Rising energy and food prices are often key to households’ perception of inflation and thus also to the risk of second-round effects in the form of higher wage demands to compensate for the loss of purchasing power caused by the high inflation. And in the current situation with labour shortages in many countries, workers may have more leverage to force through wage increases than in a situation with high unemployment. This is one the reasons why many central banks now change their rhetoric and tighten monetary policy. Financial markets are naturally focusing on the two large central banks: the Federal Reserve in the US and the European Central Bank in the euro zone. And unless the Russia conflict really derails the economic upturn, it is very likely that both central banks will be facing a new tightening cycle.  As the Federal Reserve is at the front of the cycle, there is reason to believe that the USD is facing a strengthening – until the ECB makes a clear announcement that they too will tighten monetary policy. A development which largely depends on how the war between Ukraine and Russia will unfold.

Finally it is also worth mentioning that the ECB has signed up to the green agenda. The bank will increasingly include climate change in its monetary policy decision basis to promote the green transition. This is also a key element of the EU’s huge recovery package (NextGenerationEU), the roll-out of which will start in earnest this year. And it cannot be ruled out beforehand that the green transition will add to the current price pressure as CO2 taxes and other climate taxes should be considered unavoidable in the efforts to change consumer and manufacturer behaviour. It is a situation which in its own way simply exacerbates the monetary policy dilemmas at a time of unrest and upheaval.

Do you want to here more about the current and future threats? 

This year the conference is held in exclusive settings at Hotel d’Angleterre. Read more about the conference here and sign up here.