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The global economy has been subjected to intense pressure since Russian troops invaded Ukraine on 24 February 2022. A series of adverse factors affected the global economy in 2022 including the course of the war, the energy crisis, the rise in inflation and disruption of the supply chain.
Driven by robust domestic consumption, US economic performance had already returned to pre-corona levels by the summer of 2021. Since then, however, economic growth has weakened for several reasons including the cessation of transfer payments to private households, the reduction in real income as a result of higher inflation and the weakening of the housing market due to the rise in interest rates. With an average increase of 8.0 per cent, consumer prices rose in 2022 at a rate not seen for 40 years. The increase can only be partly attributed to higher energy and food prices. Financial and monetary support measures implemented during the corona crisis caused the US economy to overheat. Therefore, the Federal Reserve (Fed) should have tightened the reins of its monetary policy much earlier.
As a result of the sharp rise in price increases, the Fed raised the key interest rate by 425 basis points to 4.5 per cent between March 2022 and the end of the year. Its goal in doing so was to restore the balance on the employment market. The high point of interest rates has probably not yet been attained due to the continuing backlog in demand. In view of the Biden administration’s USD 1.2 trillion infrastructure package, which envisages enormous investments in highway and bridge construction, water management and airports, as well as the Chips and Science Act to provide subsidies for the domestic computer chip industry, a tighter monetary policy would be justified.
Real GDP growth in the EU came as a positive surprise in the first half of 2022. The effect was largely due to consumers spending more, especially for services, following the easing of Covid-19 restrictions. Subsequently, however, the rate of growth slowed as a result of the high inflation rate and the downturn in global demand. As the fall in gas and electricity prices shows, the expected energy crisis in winter 2022 / 2023 has probably been avoided. Nevertheless, a flat recession during the winter season cannot be completely excluded. Whether and how fast an economic recovery can occur will largely depend on the development on the energy market and the extent of global demand.
Consumer prices climbed by 8.4 per cent in the Euro zone in 2022. The inflation rate therefore reached its highest level since the birth of the monetary union. However, this figure conceals a substantial inflation differential between the member states. For example, the Baltic States recorded inflation rates of over 20 per cent. After an initial period of hesitation, the European Central Bank has raised the key interest rate by a total of 2.5 percentage points to 2 per cent since July 2022.
In spite of the challenging environment, the employment market has continued to develop positively. The rate of employment and labour market participation have not been so high for decades. Thanks to robust economic growth, a net two million additional jobs were created in the first half of 2022, pushing the number of persons employed in the EU to an all-time high of 213.4 million. The unemployment rate stood at a record low of 6.0 per cent in September.
In international comparison, the Swiss economy recovered very quickly from the effects of the corona pandemic. On account of the global fall in demand and higher consumer prices, the growth rate slowed during the second half year. The experts at the Swiss State Secretariat for Economic Affairs (SECO) therefore reduced the growth forecast for 2022 to 2 per cent. A sluggish economic development is probably to be expected in the first half of 2023. But, from the current perspective, a recession is less likely due to the high level of resistance in the economy.
In Switzerland too, higher energy prices contributed to a relatively high inflation rate of 2.8 per cent. This was considerably under the rate of price increases in other European countries, but still well above the inflation target of the Swiss National Bank (SNB). The appreciation of the Swiss franc, especially against the Euro, was also a factor in limiting inflation. Nevertheless, Swiss households experienced the highest rate of price increases since 2008.
The employment market developed very favourably during the second half of 2022. The total number of employed persons grew and in September 2022 the unemployment rate stood at just 1.9 per cent, lower than it had been for over 20 years. Many business sectors complained of a shortage of skilled workers. As a result, the generally expected economic slowdown should probably lead only to a slight increase in the unemployment rate.
The period of negative nominal money market interest rates, which lasted almost eight years, ended in Switzerland on 22 September when the National Bank raised the key interest rate by a further 75 basis points. It had previously increased interest rates during the summer by half a percentage point for the first time in 15 years. On 16 December, it tightened monetary policy again by increasing the key interest rate by 50 basis points to 1.0 per cent. The step was aimed at countering the increase in inflationary pressure caused by price rises.
Liechtenstein’s economic activity slowed noticeably during 2022. The economic index of the “KonSens” Liechtenstein Institute fell in the third quarter by 0.7 index points to minus 1.2 points. Although the index value was still higher than during the financial crisis of 2008 / 2009 and the Covid-19 induced recession of 2020, it still lay in the negative zone, representing lower than average growth in historical comparison. Industry representatives and service providers still assessed the general situation as largely satisfactory at the end of the third quarter 2022 in spite of higher energy prices and supply chain bottlenecks. However, the business outlook had worsened at the majority of companies in comparison with the second quarter. The position probably remained fragile during the fourth quarter.
The Liechtenstein economy is very dependent on foreign sales and procurement markets. More than half of Liechtenstein’s goods exports go to Switzerland, Germany and the USA. In the first half of 2022, direct goods exports were about 12 per cent lower than in the previous year. In contrast, the financial centre continued its growth trend. The turnover of the three largest banks rose by 15 per cent.
The employment market developed positively with total employment rising by 3.5 per cent. The unemployment rate remained low. The main issues confronting businesses were rising prices and uncertainties surrounding the procurement of base materials. The shortage of skilled labour remained unchanged.
China’s economy grew by 3 per cent in 2022, substantially below the target of 5.5 per cent set by the party and state leadership, and was one of the weakest results for decades. Growth was only somewhat lower during the first year of the corona pandemic in 2020.
The world’s second largest economy was confronted with several problems in 2022. The slowdown in the global economy led to a decline in demand for Chinese goods. On account of the strict zero Covid policy and lockdowns in mega cities such as Shanghai, Guangzhou, Tianjin and Shenzhen, key industrial centres were closed for weeks and months. The rigorous corona policy also dampened private consumption.
Figures released by the national statistics office clearly show how seriously the real estate sector has suffered. This sector was one of the strongest drivers of the Chinese economy in the years prior to the corona pandemic. Investors and buyers are cautious because many real estate companies are heavily indebted.
The situation is exacerbated by the high level of unemployment among young Chinese. In the 16 to 24 age group, the unemployment rate climbed to nearly 20 per cent in July 2022. According to official figures, the rate stood at 17 per cent in November. The sudden change of policy by the Chinese government in combating corona caused the number of infected persons to soar, which initially will probably slow the economic recovery.
Weak economic data from China caused the majority of Asian stock markets to head south. In December 2022, inflation stood at 1.8 per cent. The factors, which affected inflation in the US and Europe, had only a limited influence on the Chinese inflation rate. In recent years, the central bank in Beijing has acted with great restraint. Extremely high sea freight costs are not applicable if Chinese factories supply the domestic market. Although the war in Ukraine is also driving up energy prices in China, because Beijing has not joined the oil and gas boycott of Russian supplies, it can still procure oil and gas from Moscow relatively cheaply.
The inflationary and interest rate shocks led to a plunge in prices on the international bond markets that was not really dampened by lower coupon income. Both government and corporate bonds were equally affected. Although the prices of high-yield and emerging market bonds recovered somewhat towards the end of the year, losses were not recouped. On balance, it could be asserted that the bond markets experienced a once in a century crash.
Monetary policy was a key price driver on the international foreign exchange markets in 2022. For example, following the large hikes in interest rates made by the Fed and the Russian partial mobilisation in September 2022, the US dollar climbed to a 20-year high. However, higher interest rates were not the only reason for the strength of the dollar. Stock market players point to the dollar’s attractiveness as a “safe investment haven”.
Furthermore, the euro suffered because of the ECB’s hesitant approach to dealing with the surge in inflation. The tide turned in favour of the euro only after the ECB had signalled its clear intent to take any steps necessary to return consumer prices to its target value of 2 per cent inflation in mid November 2022. The prospect of the US dollar losing some of its interest rate advantage probably also played a role here. By the end of the year, the euro had gained about 10 cents against the US dollar. The US dollar lost almost all of its gains from the beginning of the year against the Swiss franc.
As regards the euro/franc exchange rate, the Swiss National Bank made an about-turn in June when it stated for the first time that it no longer regarded the franc as being overvalued. Following the re-emergence of inflation on the world stage, there seemed to be only one direction for the euro/franc exchange rate with the franc gaining ground against the euro. Then in autumn 2022 a rebound occurred that continued to gain pace.
2022 on the stock markets was marked by the shock rises in interest rates, global uncertainties and high volatility. High-value tech stocks suffered most under these conditions with the Nasdaq index in the US posting big losses after years of outperformance. Indices, in which commodity and industrial companies had higher weightings, performed better in 2022.
Stock markets across the world suffered heavy losses with the Dow Jones Industrial losing 9 per cent, the Nasdaq Composite 34 per cent, the Nikkei 11 per cent and the Euro Stoxx 50 11 per cent. At the end of December 2022, the SMI leading index stood at 10‘729.4 index points, about 17 per cent under the level at the beginning of the year. The MSCI World Index, which tracks the stocks of 23 developed countries, fell by 16.5 per cent.