One crisis gives way to the next

Gas is Vladimir Putin's economic weapon. (

War in Ukraine brings misery and geopolitical uncertainty to Europe. Economically, however, the impact of sanctions on the eurozone is small, as exports to Russia are not very significant. The biggest economic risk for Europe, in Swiss Life Asset Managers' view, would be a halt to Russian gas supplies.

No sooner has the economic uncertainty of the pandemic given way than the next wave of uncertainty rolls into Europe with the war in Ukraine. The sanctions against Russian banks, which also affects their access to the SWIFT payment communication network, will make exports to Russia more difficult. The latter, however, have become much less important for the eurozone, and in 2020 made 0.5% of GDP, a halving since the peak in 2012, Swiss Life Asset Managers notes.

Russia, for its part, has foreign exchange reserves of about 640 billion. USD accumulated, which may partially cushion the impact of potential financial sanctions (cf. Figure). However, the West's recent sanctions against Russia's central bank could cut off access to much of these reserves. In a risk scenario, this harsh measure could, according to the experts at Swiss Life AM, make Vladimir Putin all the more willing to impose countermeasures and stop gas deliveries to the West. But it could also be that in this weakened position, it will have to rely all the more on its main source of income – energy exports.

Russia's Foreign Exchange Reserves

If Russia uses gas supplies as leverage, Europe would be more vulnerable, concludes Swiss Life AM. According to data from the think tank Bruegel, pipeline supplies from Russia are currently about a third lower than last year. Imports of liquefied petroleum gas from other countries would have doubled year-on-year, but probably could not compensate for a significant curtailment from Russia. In the event of a supply freeze, energy rationing and stagflation are possible consequences. Even without such an escalation, energy prices are likely to remain high, although they have so far left surprisingly little mark on private consumption. "The reason is the labor market, which is in great shape in the euro zone. Employment has already exceeded pre-crisis levels, and the unemployment rate in December 2021 reached a new low of 7.0% reached.", according to the economists at Swiss Life AM.

Sanctions against Russia could hit Germany slightly harder than other countries; exports to Russia accounted for around 0.7% of GDP in 2020. However, there are signs of a turnaround in fiscal policy, as the government has allocated generous funds for rearmament and wants to significantly increase efforts to move away from dependence on Russian gas, for example by building liquefied gas terminals.

Inflation forecasts in the euro zone adjusted

Annual inflation in Germany probably fell in January from 5.3% to 4.9%, but this decrease was much less pronounced than expected by Swiss Life AM. Inflation continues to be driven heavily by energy prices.

Contrary to expectations, inflation in the euro zone did not fall in January, but rose from 5.0% to 5.1% continued to rise. A good half of inflation is due to higher energy prices, while core inflation has fallen slightly, from 2.6% at 2.3%. Wage pressure is still low, but is likely to increase in 2022. Sustained high energy prices and efforts to quickly wean off dependence on Russian gas argue for a higher inflation regime in the short to medium term and have resulted in corresponding adjustments to Swiss Life AM's forecasts for 2022 and 2023.

Inflation in the USA goes up

U.S. inflation surprised on the upside again in January 2022, rising from 7.0% to 7.5%. Inflation has been on the rise, as the experts at Swiss Life AM explain. While the energy (27% year-on-year price increase) and food (+7%) categories continued to be strong drivers, core inflation (+6%) also picked up. Particularly noticeable were rising prices in the index heavyweight medical services, which was not yet a driver of inflation in 2021. Combined with surprisingly strong wage increases in the January labor market report, this has laid the groundwork for the Federal Reserve's first interest rate move in March 2022, it said.

Economically, the U.S. is affected by the Ukraine war mainly via higher energy prices. Inflation has already left its mark on economic data: Consumer sentiment has fallen to its lowest level since 2011, according to a University of Michigan survey, with respondents mainly complaining about high prices on durable goods. Consumption has not collapsed as a result; in fact, nominal retail sales increased at an above-average rate in January. But beware, Swiss Life AM economists warn: "Inflation is at work here too, with price-adjusted sales volumes moving sideways at high levels since March 2021."

The tighter monetary policy will also have a braking effect: The average interest rate on a 30-year fixed-rate mortgage, with which a house is usually mortgaged in the USA, has risen since the beginning of the year from 3.3% to 4.2% increase. The housing market, which is currently still doing very well, is likely to lose some momentum in 2022, as is the investment cycle, which has benefited from buoyant lending activity.

In terms of GDP growth, Swiss Life AM experts expect an acceleration in the second quarter after a weak start to the year due to the pandemic, driven by consumption of services, which should also benefit from the steady improvement in the labor market.

Forecast comparison

Delayed rise in inflation in Switzerland?

With 1.7% annual inflation as of January was at a high since October 2008. Nevertheless, inflation in Switzerland remains low by international standards and still in line with the Swiss National Bank's target band of 0% to 2%. One striking feature of inflation measurement in Switzerland, according to Swiss Life AM, is the high proportion of government-fixed prices for goods and services in the basket of the national consumer price index. So far, this circumstance has had a price-dampening effect, especially on electricity prices. Higher costs, however, could be passed on to the end users after all, even with a delay in administered prices, say economists.

The first official estimate for Switzerland's gross domestic product for the fourth quarter of 2021 shows quarterly growth of 0.3%, exactly in line with Swiss Life AM's expectations. Combined with slight revisions to previous quarters' data, real GDP growth for 2021 as a whole is 3.7%. Swiss Life AM remains comparatively cautious in its GDP growth forecast for this year and next year.

Inflation is not an issue in China and Japan

In China, the rigorous zero-covid approach is weighing on the domestic economy, experts note. During the New Year's holiday, various provinces asked the population not to leave their cities. High-frequency data show that travel activity increased only slightly compared to the previous year and was about 50% below pre-crisis levels. In addition, regional production shutdowns in the run-up to the Winter Olympics weighed on manufacturing activity, causing the Caixin industrial PMI to fall to 49 in January.1 fell.

Another risk to China's growth prospects is the Ukraine war. If the conflict escalates drastically and slows down Europe's economy significantly, China could also feel the impact. After all, exports from China to the EU account for nearly 3% of China's GDP.

Inflation is not an issue in China. In January it was 0.9%, well below the 3% target, giving the authorities room to cut monetary policy rates further, according to Swiss Life AM. Producer prices also fell to 9.1% from previously 10.3%. This reduces the pressure on manufacturers to pass on costs to customers.

Inflation in Japan is even lower than in China. In January, it was only 0.5% and is currently an issue for energy and food in particular. In contrast, Japan's version of core inflation, which excludes perishable food and energy, slipped further into deflation (-1.1%). Because wage growth has also slipped slightly into negative territory, there are no reasons for the Bank of Japan to change its monetary policy, according to Swiss Life AM.

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