EU economy risk mitigation crucial for Azerbaijan Anaysis by Caliber.Az

The first month of the new year is coming to an end and during this relatively short period, there has been a positive change in the assessment of the business outlook for 2023. A few months ago, most leading donor and rating agencies predicted the inevitable onset of recession and a decline in global GDP. Today, such strong opinions have become much less and, moreover, according to Financial Times experts as well as International Monetary Fund (IMF) forecasts, the eurozone can avoid recession, and China and Asia are even expected to experience a tangible recovery. Reducing risks to the EU economy is crucial for Azerbaijan, a large part of whose exports are linked to markets in the eurozone.

Having survived a severe pandemic crisis relatively recently, the global economy has been burdened by unprecedented inflation over the past year - a consequence of risky monetary policies of the US and EU financial regulators in the previous two years. The Russia-Ukraine war that began in 2022, coupled with the energy and food crises, led to the collapse of decades-old transport cooperation, deepening problems in industrial supply chains. Overall, the war was a trigger for many negative processes in a world economy that has not yet had time to recover from the effects of COVID-19. The worst-case scenario was the unwinding of the global inflation flywheel. Thus, last year the growth of consumer prices in 38 leading member states of the Organisation for Economic Cooperation and Development (OECD) reached a critical threshold of 10.7%, an unprecedented double-digit figure for the past forty years. As a reminded, in the highly ambiguous year 2021, annual average inflation in the OECD also reached a 25-year high of just over 5%.

Another serious downside was the slowdown in global economic growth in 2022. The Economist Intelligence Unit estimates that global GDP growth fell by 1.1 percentage points year-on-year to 2.8%. At that, the war in Ukraine for the global economy (whose financial volume in 2022 was $101.6 trillion), according to analysts, cost about $1 trillion. And if the intensity of the Ukrainian conflict increases, according to calculations of the OECD, in 2023, the world economy can lose $2.8 trillion in lost output. Similar forecasts predicting a recession in 2023 were repeatedly voiced by the experts of the World Bank, IMF, international rating agencies, etc.

However, in the second decade of January this year the tone of assessments of the global economy has changed from negative to moderately positive: according to the Financial Times, based on research data of Consensus Economics, the Eurozone economy will grow by 0,1% in 2023. What is remarkable here is not the growth itself, it is very small, but the overall positive trend, because during the last third of last year, most expert groups predicted a recession of at least 0.5% in EU countries and an annual increase in unemployment of about 7.1%. Consensus Economics experts attribute their qualitatively changed forecasts amongst other things to lower energy prices and an earlier-than-expected recovery of the Chinese economy which could provide a boost to global demand.

New IMF estimates for the economic situation in 2023 look even more optimistic, and experts at the Monetary Fund have signaled that they will soon raise their forecasts for global economic growth. In particular, during the recently concluded World Economic Forum in Davos, IMF Managing Director Kristalina Georgieva said that the overall global economy is not feeling as bad as was announced a few months ago. Georgieva stressed that among the positive factors that could support global growth was the lifting of quarantine restrictions in China and the Chinese economy could reach 4.4% this year, once again exceeding the global average. Morgan Stanley experts put Chinese GDP growth at 5.7%, increasing it by 0.3 percentage points due to the revision of fiscal and monetary policy of the PRC.

But overall, the IMF forecasts global GDP growth of 2.7% in 2023, and it is possible that these figures can be slightly improved in the near future. The leading growth driver will be the Asian countries with an increase to 4,6%, while in India the Asian Development Bank (ADB) forecasts GDP growth of 7,2%.

For the European Union and the USA, forecasts for 2023 are much more meager: OECD experts as well as JPMorgan analysts forecast GDP growth of around 0.5%. Nevertheless, the main positive sign is that the negative processes leading to a deterioration in the current year have slowed down, as the EU economy's resilience to risk has strengthened in recent years. The key factors here are falling natural gas prices, improved supply chains, a strong labour market, surplus savings, and a gradual easing of the inflation burden due to the European Central Bank (ECB)'s efforts to raise its policy rate to 2%. Goldman Sachs economists add to this list the expected increase in trade demand in China, which will significantly boost trade with Europe, and have accordingly improved the forecast for EU GDP growth to 0.6%.

Of course, for Europe, there are still high risks of an escalating West-East confrontation on the back of the ongoing war in Ukraine, as well as the threat of a further increase in inflationary pressures. Overall, however, the largest Swiss financial holding, UBS Group AG, estimates that the likelihood of a recession is now less than a third, compared with estimates from the second half of last year when such threats were estimated at 90%.

It is clear that the recent positive developments in the EU economy are highly desirable for Azerbaijan, whose energy exports are largely linked to the situation in the European market. Its role for our republic cannot be overestimated and the data of the State Customs Committee (SCC) testifies to it: total trade turnover of Azerbaijan with European countries in January-November 2022 exceeded $26.229 billion, at that, the specific weight of the Old World states in the total foreign trade turnover of our country amounted to 53.29 %. It seems likely that these figures will only increase, given the country's plans to increase gas, oil, and electricity supplies to the large European market. On the positive side, the trade surplus is expected to continue in 2023, with oil prices still high and plans to increase gas exports to the EU through the Southern Gas Corridor (SGC) system. Demand for Azerbaijani pipeline gas in Southern Europe is stable, both because of the stability of such supplies and its relative cheapness compared to liquefied gas from the US and the Gulf. Accordingly, Azerbaijan plans to increase gas supplies to Europe to at least 11.6 billion cubic metres in 2023, and possibly even more. In five years Azerbaijan plans to increase gas supplies to the European market to 20 billion cubic metres per year. In an even more distant future, Azerbaijan in partnership with Georgia and Romania will start supplying several gigawatts of electricity, mainly to the European market, which also contributes to increased trade turnover with the EU and our country's trade surplus.