August 2022
The global energy crunch is hitting Europe the hardest, with the continent looking to face a challenging winter amid an energy standoff with Russia.

Average European electricity prices are at almost US$300/MWh, more than tripling from a year earlier. Germany has been forced to bail out Uniper, a crucial gas provider squeezed by Russia, in a EUR15bn (US$15.2bn) rescue deal.

AME’s European composite gas price is forecast to average US$40/MMBtu in the September quarter of 2022, jumping 32% from the previous quarter, driven by constrained supplies and robust demand. The price averaged US$45.50/MMBtu in July 2022, surging 50% from June and 268% higher from the same month in 2021.

Surging energy prices are lashing the Eurozone’s economic rebound from the pandemic. As a result, we expect the region to grow 2.5% in 2022, down from our previous forecast of 2.8%, and 1.9% in 2023, down from 2.3%.

Looking to avert an energy meltdown, the EU hammed out a deal on 27th July to curb natural gas consumption by 15% (45bcm) from August to March. The move came a day after Russian state-owned monopoly Gazprom said it would further reduce supplies to Germany. Gazprom has cut flows to 20% of Nord Stream 1’s capacity (33bcm), after initially restoring flows of just 40%.

The plan also outlined that the 27 member states should prioritise switching fuels to renewables or coal, oil or nuclear power if needed. The EU is currently pushing member states to ramp up storage to 80% by October, up from a current 65%.

The bloc’s efforts to diversify its energy supplies are accelerating. Since the start of 2022, gas imports from non-Russian countries—primarily the US, UK, Norway and Azerbaijan—have risen by 35bcm, according to the European Commission. In the first six months of 2022, Russian flows to Europe were down 35% from a year earlier.

Germany plans to build at least five floating LNG import terminals, to be put into operation this year and next, with a combined capacity of 20bcm. There are also plans for two permanent onshore sites (13.3bcm and 8bcmpa). The country has also inked new import deals with Qatar and the US.

Europe has ramped up renewable energy this year, adding an extra 20GW of capacity, which is equivalent to 4bcm of gas. The EU added a record 36GW of new renewable power capacity in 2021, rising 30% from 2020.

The country is also planning to accelerate its push into clean energy, earmarking about EUR200bn (US$218bn) for investments through 2026. Germany is aiming for 80% of renewable electricity consumption by 2030 and 100% by 2035, up from 49% in the first half of 2022.

Meanwhile, Brussels approved EUR5.4bn (US$5.5bn) in funding for a hydrogen research and innovation project in July. The Hy2Tech scheme, which comprises 41 projects from 15 EU member states, is expected to unlock an extra EUR8bn (US$8.1bn) in private investment.

 

AME’s Economic Expectations

AME expects global economic growth of 2.9% for 2022, down from our April forecast of 3.9%. This is based on the combination of negative supply shocks, weakening growth, and tightening monetary conditions to rein in soaring inflation.

In 2023, we expect global GDP growth of 3%, down from our April forecast of 3.6%, on stagflationary headwinds, rising financial instability, continuing supply strains, and worsening food security.

The need to tackle inflation is outweighing concerns about a slowing economy. More than 75 central banks have increased interest rates so far this year, often at levels unseen in decades. By contrast, China’s deeper economic slowdown is likely to prompt looser monetary policy and fiscal stimulus.

Taming high inflation is expected to be relatively quick. Over three quarters of pandemic-induced supply disruptions have shown signs of easing but remain constrained. The Russia-Ukraine war has pushed up food and energy prices, while supply chain disruptions resulting from China’s zero-Covid policy weigh on growth prospects.

The US and Europe are witnessing the fastest price gains in four decades, in the face of rising energy and food costs. In June 2022, US inflation accelerated to 9.1% from a year earlier, the largest gain since the end of 1981, while EU consumer prices climbed to 8.6% in June from a year earlier.

Two of the world’s largest consumer groups, Unilever and Coca-Cola, increased prices by 11.2% and 5% from a year earlier, respectively, in the June quarter.

The US Federal Reserve has acted aggressively as tight labour markets and strong consumer demand reinforce the need to cool the economy. The Fed raised interest rates by 0.75% in July, following a 0.75% hike in June—the biggest rate increase since 1994. The central bank previously raised interest rates by a 0.25% in March and 0.5% in May. The Fed broadly expects rates to rise to 3.4% by the end of the year, the highest level since 2008, and then to 3.8% in 2023.

The European Central Bank also joined the inflation fight in July, raising its three interest rates by 0.5%, ending an eight-year era of negative interest rates. The move brought the policy rate from minus 0.5% to zero. Consumer prices in the eurozone rose on average 8.6% in June from a year earlier, more than four times the central bank’s target of 2%. The last time inflation was this bad, the euro didn’t exist.

The European Central Bank has acted more slowly to rein in inflation because it has been hit harder by Russia’s invasion of Ukraine, which has fuelled supply chain disruptions and surging energy prices. However, the risk of persistently high inflation outweighs a deteriorating economic growth outlook.

This year, inflation is expected to come in at 5.7% in advanced economies and 8.7% in emerging market and developing economies. Over the next two years, inflation will gradually come down as demand moderates. This will be driven by cost pressures for consumers and businesses and higher interest rates.

 

United States

AME expects US economic output to come in at 2.5% in 2022, down from our previous forecast of 4%, on reduced household purchasing power and tightening monetary policy. In 2023, we expect growth of 2.4%, down from 2.6%.

The US economy shrank at annual rate of 0.9% in the June quarter, as stubbornly high inflation and rising interest rates crimp household budgets. The contraction followed a 1.6% annual decline in the March quarter.

The biggest drag on growth was lower business inventories, which removed 2% from the headline figure. While inventory data has been very volatile over the last two years, the slowdown also reflects the impact of the Fed’s aggressive tightening on business investment.

The impact of hefty rate increases has been evident in the housing market. Residential investment fell 14% in the June quarter. Further rate increases will pose additional pressure on the sector. In June, real estate brokerages Compass and Redfin announced plans to lay of 8% and 10%, respectively, of their company’s work forces.

Consumer prices surged 9.1% in June, driven by rapidly rising costs for gas, food, and rent. Core inflation climbed 5.9%, barely a slowdown from May’s 6% increase, providing further evidence that price pressures are proving broad and stubborn.

Energy prices overall rose 41.6% on-year in June and were up 7.5% from May. Gasoline prices surged by 59.9% on-year and rose 11.2% on-month. However, gas prices have since cooled, which should help inflation moderate in July.

Consumer spending jumped in June as consumers continued to absorb stubbornly high prices. Consumers boosted their seasonally adjusted spending by 1.1% in June, up from a revised 0.3% increase in May.

The high cost of living is spurring higher levels of borrowing. US household debt surpassed US$16tn for the first time ever during the June quarter. The share of current debt transitioning into delinquency remains at historically low levels, a reflection of the strong jobs market. High inflation is also forcing consumers to dip into their savings. The personal savings rate fell in June to 5.1%, the lowest since August 2009.

The economy still has important areas of strength. Job growth has remained robust, averaging about 380k a month over the past three months. The unemployment rate also remains historically low at 3.6%, just shy of its pre-pandemic level.

 

China

AME expects China to grow 4.3% in 2022, down from our previous forecast of 4.8%, and below the Chinese government’s official target of 5.5%, as Covid-19 lockdowns hit growth. In 2023, we expect GDP growth of 4.8%.

The Chinese economy expanded 0.4% on-year in the June quarter of 2022, according to official data, narrowly escaping a contraction following the fallout from harsh Covid-19 lockdowns. The result marked China’s second-worst quarterly growth figure in 30 years, following a contraction at the beginning of the pandemic.

On a quarterly basis, growth sharply slowed from the 4.8% growth recorded in the March quarter of 2022. The slowdown reflected the economic squeeze from a two-month lockdown in Shanghai.

With growth in the first half of 2022 coming in at 2.5%, Beijing’s 5.5% annual growth target for 2022 is expected to be out of reach. That target is itself a three-decade low. Fu Linghui, a spokesperson for the NBS, admitted that reaching Beijing’s growth target this year would now be “challenging”.

China’s leadership has reaffirmed their commitment to its zero-Covid strategy, despite the social and economic costs of snap lockdowns, mass testing and closed borders. A new layer of zero-Covid infrastructure, such as testing sites and quarantine facilities, is being built across the country.

Recent indicators pointed to a rebound in June. Retail sales were down 4.6% on-year in the June quarter after a 23% fall in April. Consumer spending, a critical gauge of sentiment, has lagged the wider recovery since the start of the pandemic, partly due to travel restrictions. Industrial production rose 3.9% on-year in June, compared to growth of 0.7% in May. Factory output edged up 0.7% on-year in the June quarter. Fixed asset investment for the first half of the year came in above expectations, up 6.1% versus 6% predicted.

Real estate woes deepened. Investment in real estate in the first half of the year fell by 5.4% from a year ago, worse than the 4% decline in the first five months of the year.

Unemployment across China’s 31 largest cities fell from pre-pandemic highs to 5.8% in June.  However, youth unemployment has hit a record high of 19.3%.

Beijing is promising a 33-point plan to speed up recovery as lockdowns curb growth. The measures include a reversion to large-scale infrastructure projects, with a US$120bn credit line, and US$21bn in tax breaks. In May, China’s central bank cut its benchmark rate for mortgages and lowered the mortgage rate floor for first-time home buyers, in a bid to prop up the property market. China’s real estate sector accounts for roughly 30% of GDP.

Looking at China’s decarbonisation goals, rooftop solar is booming. The country plans to install 108GW of rooftop solar this year, nearly double last year’s 55GW. In July, China announced it is aiming for 50% of new factory rooftops to include solar installations by 2025.