A Meteor Shower: A View from Madrid

By Diane C. Swonk, Chief Economist, Grant Thornton

The pandemic, the war in Ukraine and escalating  geopolitical tensions with Iran are all extraordinary events. I have likened each to being hit by a meteor, which knocks the global economy off its axis. They have suspended the rules of gravity by increasing the risk of inflation at the same time they boosted the probability that we slip into a global recession.

The term “stagflation” has been resurrected from the rubble of the 1970s, as people try to make sense of the economic malaise we are dealing with. Some countries are already there, with inflation picking up even as their economies stall.

Making matters worse is that we are experiencing these shocks at the same time that the effects of climate change are compounding. The incidents of extreme weather events are accelerating.

Central banks are rushing to play catch up and cool demand to meet what has become a chronically undersupplied world. They can’t grow food or pump more oil, but they can reduce demand to derail the upward pressure on prices that shortages are causing.

This edition of Economic Currents provides a global economic roundup. It represents the culmination of a week of meetings with business leaders, economists and policy makers. The group included more than 25 members from almost as many countries. The meetings are strictly Chatham House rules, which prevent me from quoting anyone directly but enable me to share the content.

This year’s meeting was held in Madrid, three years after we first planned it. The tone of our discussions was the most ominous since the onset of the pandemic. The risk of recession in our own economies was the highest in anyone’s recent memory. Global growth is expected to slow to around 3% in 2022, less than half the pace of 2021. Risks are to the downside.

The only silver lining is the unity that Russia’s invasion of Ukraine triggered within NATO. That succeeded where the pandemic failed in proving that democracies could band together to counter the actions of tyrants, even in a more fragmented world.

Global Roundup

North America

The U.S. fell into negative territory in the first quarter and looks poised to grow less than 1% in the second. Much of the weakness in the first quarter was due to the blow that the war in Ukraine and lockdowns in China dealt to exports. The three pillars of domestic demand – consumer spending, housing and business investment – actually accelerated.

More fundamental cracks in the foundation of growth have formed. Consumers are beginning to feel the burn of inflation, draining their savings, tapping into credit, making fewer trips to the grocery store and when there, making difficult choices about what they can afford. Name brands are out; store brands are in.

Home buying and building have plummeted. First-time buyers are being crowded out, while all cash buyers are pulling back. Home values will be the next shoe to drop.

Business uncertainty has soared and with it so has pessimism about the future. Small businesses reported the lowest level of optimism about the economy on record in June. The data date back to 1973, another ominous year.

Inflation continues to surge and the Federal Reserve is raising rates. Fed Chairman Jay Powell has pledged to derail inflation, even if that means a rise in unemployment.

Growth for the year is forecast to average 2% but those gains mask the depth and breadth of the slowdown. Growth in 2023 is expected to dip below 1%; unemployment will rise to 5.5% before inflation slows to the Fed’s 2% target. Canada is not far behind us, although its dependence on oil may keep the country from slowing as much as the U.S. Canada has seen some pickup in oil production since prices spiked.

ESG targets, the push to reduce carbon emissions and the pivot to renewables are all hurdles to a more typical ramp. Oil producers see the shifts we are enduring, most notably when it comes to the climate.

They don’t want to invest in assets that will soon be stranded. Shortages of steel and labor, and neglect, are holding back a larger ramp-up in global production.

That suggests a much more sustained period of energy inflation. Even OPEC, which is the world’s go-to producer when oil prices spike, has been unable to meet its own expanded production targets.

Rate hikes, a corrosive inflation and high household debt are expected to temper gains in the second half of the year. Consumer spending has slowed and housing cooled.

Growth in Canada is expected to cross 3% in 2022 and slow more abruptly in 2023. The unemployment rate is expected to move up much less than in the U.S.

Mexico will trail its neighbors to the North. Oil production at Pemex dropped to the lowest levels since the 1970s in April due to chronic infrastructure problems.

Business investment has been stifled in response to harsher government regulations, notably professional business services. Even the recovery in travel and tourism is lagging other parts of the world.

Mexico may be on the winning side of firms’ push to regionalize supply chains and “friend-shore,” offshore to nations friendly with the U.S. Manufacturing activity outside the vehicle sector is picking up with foreign investment.

Mexico is expected to stagnate in 2022. The prospects for 2023 are not any better.

South America

Brazil is expected to slow to a virtual standstill in 2022. The Bank of Brazil is already hiking rates aggressively. Those shifts, high household debt and spiraling prices are eroding purchasing power. Many households can’t afford food, let alone petrol to cook it.

The business community is awaiting the outcome of the next presidential election. That is delaying decisions on domestic investment.

Brazil is expected to slow to a negligible 1.2% in 2022, and slip below to 0.5% in 2023. That constitutes a recession.

Colombia is a noticeable outlier. Oil and coal account for 50% of the country’s exports, which picked up in response to the war.

The election of the country’s first leftist president could be a setback. President-elect Gustavo Petro may roll back economic reforms and undermine confidence in investment in the country.

Export gains and the fiscal stimulus they are triggering could propel growth in Colombia to close to 6% in 2022. Prospects in 2023 are closer to 2% and deteriorating.


The Eurozone is feeling more of the effects of the war in Ukraine and recent lockdowns in China. The only thing helping in the near term is the return of travel and tourism, which has boosted growth in the South.

Madrid was as packed as I had ever seen it; Barcelona was even more crowded with tourists. Many places and flights were sold out.

The European Central Bank (ECB) has been slow to respond to inflation, but announced that it will start raising rates in July. It plans to exit negative rates by September.

We watched the press conference by the ECB’s Managing Director Christine Lagarde with our Eurozone colleagues. She left them frustrated with her apparent refusal to address the risks of debt fragmentation.

Sovereign debt yields for the most indebted countries are at risk of blowing up as the ECB hikes, which could up the risk of a default. That would serve no one as it would raise the risk of a financial crisis.

A week later, the ECB was forced to call an emergency meeting to address the issue. It pledged to use the tools it has and to develop a new facility to limit yield spreads.

The Eurozone is expected to slow to 2% in 2022, and dip below that pace in 2023. That is when households turn their heaters on and feel the brunt of energy prices.

Eastern Europe performed much better than the rest of Europe in the first quarter, despite the war in Ukraine. Hungary and Poland outperformed the Czech Republic and Slovakia, but growth is now slowing.

Workers from Ukraine returned to fight, which exacerbated labor shortages. This is at the same time that those countries are struggling to meet the needs of refugees. Poland has accepted the lion’s share of those fleeing.

Manufacturing has slowed, given their close ties to Russia. Consumer confidence continued to deteriorate in May, even as it improved in the Eurozone.

President Viktor Orban won a fourth term by supporting Vladimir Putin and his invasion of Ukraine. This is making him even more of a pariah to his Western colleagues and could undermine foreign investment in the country.

Hungary and Poland are expected to expand about 4% in 2022, twice the pace of the Eurozone. The Czech Republic and Slovakia are forecast to grow about 2%.

The UK is struggling with the inflation triggered by Brexit, which forced it to renegotiate trade ties with the rest of Europe. That imported inflation is adding to the upward pressure on prices associated with reopening and the war.

The Bank of England moved to raise rates ahead of many other central banks. Those hikes were not enough to keep inflation from flaring. Double-digit gains are likely.

An erosion of purchasing power and delays in investment due to supply bottlenecks and labor shortages are expected to slow growth to a little above 3%. That is less than half the pace of 2021. The economy is expected to flatline or worse in 2023.


Japan slowed more than other countries in response to the pandemic and is still struggling. Manufacturing has suffered a greater setback due to its close links to China and lockdowns there. Tourism remains weak, which was fueled by gains from China.

Japan is experiencing some of the hottest inflation since 2014; the core inflation rate is expected to remain above the central bank’s 2% target through year-end. The Bank of Japan has decided to stay on the sidelines after flirting with deflation for decades.

 Japan is expected to remain stuck with growth slightly below 2% in 2022 and 2023. That is not enough for it to regain what was lost to the pandemic.

China will no longer be an engine of global growth; instead it could be an anchor. That is a major shift for the global economy from the last two decades.

The recent Omicron outbreak constrained activity more than during the initial lockdown of Wuhan in January 2020. President Xi Jinping plans to maintain the zero[1]COVID policy through the Communist Party elections in November, perhaps longer.

China is more vulnerable than other places to infection because of a low vaccine rate, poor vaccine efficacy and a low rate of prior infections. Still, many of our contacts worry that the zero-COVID policy is more about controlling the population than the virus.

China is attempting to stimulate its economy but there are limits to what it can accomplish. Defaults in the private sector continue to climb, while home buyers are reluctant to purchase from a builder who might go belly up before their homes are completed.

China has supported Russia in the invasion of Ukraine in its rhetoric but not its actions. Some hoped this war would be a deterrent to China and its ambitions regarding Taiwan. That remains to be seen. China flew its largest number of war planes this year into Taiwan air space as the U.S. considered more military support for Taiwan.

China’s official growth figures will show that it slows to the mid 4% range in 2022 and rebounds in 2023. Unofficially, China could actually lag growth in the U.S. in 2022, especially if more lockdowns are enacted.

India is expected to remain one of the fastest growing economies even as prospects for growth fade. Prime Minister Narendra Modi’s populist tendencies are seen as a detriment to the country’s longer term performance. He was widely criticized for his decision to curb wheat exports amidst shortages from Ukraine.

India abstained from criticizing Russia’s invasion of Ukraine. India has close military ties with Russia, most recently relying upon Russia to provide weapons to fend off Chinese aggression.

Exports from India are expected to slow in response to weakness abroad and Modi’s export curbs. Domestic investment remains relatively strong supported by government incentives in the private sector.

It is unclear how much oil India will continue to buy from Russia at discounted prices. Embargoes on insurance for ships carrying Russian oil will make it harder for those ships to sail.

Growth in India is expected to slow to 7% in 2022 after coming close to 9% in 2021. Prospects for 2023 are littered with risks, not the least of which is another variant of COVID emerging.

Pacific Rim

Australia suffered the most draconian lockdowns of the pandemic among democracies. Some Australians were not even allowed to return home from India during its Delta wave, which cost them their lives.

The Royal Bank of Australia has begun raising rates, which will hit households. Housing is particularly vulnerable to a correction, given the fact that mortgages are not fixed and change with market rates.

This is at the same time that relations with China have soured. The flow of immigrants that moved from China to Australia has also come to a standstill. Our contacts within Australia are worried that COVID restrictions will leave scars and more permanently suppress immigration, which would be a blow to the labor market.

Growth in Australia is expected to slow to 4%. Growth is expected to dip below 3% in 2023. Australia is a country to watch on the climate front given its higher dependency on coal exports, which plummeted as China cut its imports from the country dramatically.


The continent was already in a weakened position prior to the war due to COVID, climate change, security risks and capacity constraints. COVID has fallen out of the headlines but the region remains at risk for outbreaks; vaccines are plentiful but vaccine hesitancy is rampant.

energy and food prices are expected to exacerbate the economic woes of the poorest countries but not lift the fortunes of commodity producers. Nigeria and South Africa are expected to remain laggards. Civil unrest is a major obstacle.

Africans are understandably dismayed at the preferential support Ukraine received from the West. Many countries have suffered wars and worse with no aid from the West.

Investment in the region remains difficult – gross understatement. Policy instability is hampering long[1]term decisions, while governments have been known to repatriate profits. Existing infrastructure is lacking; corruption is rampant and civil unrest will worsen with food shortages.

Geopolitical Risks

Sanctions were seen as a necessary but cautionary tale. They capped Russia’s capacity to fund the war and likely made China think twice about how it deals with Taiwan.

They have historically failed to deliver the ultimate prize: regime change. North Korea, Iran and Cuba are examples.

China is still looking to expand its sphere of influence and counter U.S. hegemony, while Iran’s progress on a crude nuclear bomb has only escalated tensions in the Middle East. None of this news is reassuring.

My own take is the war actually unified more than it divided, especially within Europe. The European Union moved to fast track Ukraine’s membership, while Finland and Sweden applied for membership in NATO.

Russia’s invasion of Ukraine forced to the forefront our collective challenges: the need to more effectively deter autocratic leaders; rebuild war-torn economies; accelerate the shift away from fossil fuels and slow the pace of climate change; and limit inequality both within and across borders.

We have lost millions of souls to wars, pandemics and famines. That doesn’t have to be the case going forward.

Bottom Line

I will end where I started. The pandemic and war were akin to being struck by a meteor. They knocked the global economy off its axis. The good news is that we are not dinosaurs. We are still here.

Meeting for the first time in person in three years reminded me of how important it is to congregate and share ideas. It is much easier to see how the pieces of the puzzle can come together and the picture they form when they are all in the same room.

There is something magical about the energy of a space that is shared instead of viewed. I thought about that a lot as I stood staring up at the Sagrada Familia, Barcelona’s most famous cathedral. Pictures on a computer screen don’t do it justice.