CHAPTER 4 New normal business environment

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4.1 GLOBAL MACROECONOMIC CONTEXT

In 2020, the world economy contracted sharply due to the COVID-19 pandemic and the control measures imposed. In 2021, thanks to the phasing out of pandemic-related restrictions and progress in vaccination, the global economy showed remarkable growth of around 5.5%.

Following this strong upturn, the World Bank expects a sharp slowdown in the world's major economies in the first half of 2022, as published in its latest macroeconomic outlook report1. This slowdown will be caused primarily by market uncertainty stemming from the new COVID-19 variants, rising inflation and income inequality across economies, significantly penalising the emerging economies.

In this respect, in February 2022 the conflict between Russia and Ukraine started, which has increased this uncertainty and is expected to have economic and social impacts. In addition, the sanctions announced against Russia in recent days could also have an impact on the global economy. As far as the Spanish economy is concerned, the conflict could slow down the economic recovery and drive up inflation.

In the short-term, the conflict is having an impact on global energy markets, where Russia plays a key role as the world's third largest oil producer and largest exporter. In this respect, a rise in raw material prices can be observed, which could boost inflation.

The IMF estimates world economic growth will be 4.1% and 3.2% in 2022 and 2023, respectively, although these estimates could be altered by the economic-financial impacts of the conflict. However, the different world economies will be affected in different ways: growth in advanced economies is expected to slow from 5% in 2021 to 3.8% and 2.3% in 2022 and 2023, respectively, while growth in emerging and developing economies is expected to decline from 6.3% in 2021 to 4.6%. and 4.4% in 2022 and 2023.

The fact that many emerging and developing countries are unable to implement macroeconomic policies to support economic activity, new outbreaks of COVID-19, rising inflation and bottleneck pressures in supply chains will have a significant impact on external demand and economic growth.

To control inflation, some countries are withdrawing support measures ahead of the full economic recovery to pre-COVID-19 levels. The World Bank also stresses that vaccination must be carried out in a more global and equitable way so that the pandemic can be controlled, and future economic growth can be more homogeneous and sustained over time.

As for the European Central Bank, it expects that, after Euro Zone growth of 5.1% in 2021, the area will continue to recover, albeit at a more moderate level in 2022. This growth will be driven by domestic demand, a more buoyant labour market and increased spending due to savings accumulated during the pandemic. This outlook will be conditioned by new waves of COVID-19, rising energy costs and supply chain bottlenecks.

As far as the Spanish economy is concerned, the Bank of Spain2 exposes the great uncertainty to which the projections are exposed, derived from the evolution of the pandemic, distortions in supply chains and inflation pressures.

In this respect, future markets are expecting inflationary pressures to fall in 2022 due to the gradual elimination of the effects of bottlenecks and the drop in energy prices. Nonetheless, geopolitical issues may well reduce these expectations.

The Spanish economy is, moreover, facing another major uncertainty, namely, the use to be made by Spanish households of savings accumulated during the pandemic (more than 6% of GDP), which will condition private consumption and therefore demand.

Nonetheless, despite the instability in 2021 and future uncertainties, GDP has grown by 4.5% in 2021 and is expected to grow backed by the projects financed through the Next Generation programme (the EU recovery plan) and the maintaining of favourable financial conditions, by 5.4% in 2022 and 3.9% in 2023. Therefore, if the trend continues with this outlook, the pre-pandemic GDP would be recovered between the end of 2022 and the beginning of 2023. 1 Global Economics Prospects, January 2022. 2 The Spanish economy in 2022. Economic policy situation and challenges.