Economists from the Vienna Institute for International Economic Studies (WIIW) are frequent guests at Croatian conferences, and they are also excellent interlocutors who gladly answer journalists’ questions. Probably the most well-known among them was the late Vladimir Gligorov. However, the Institute also employs young analytical forces, so it is not inaccurate to say that Branimir Jovanović has ‘inherited’ Gligorov’s position as a distinguished analyst of the region and the EU, as he is engaged in the Institute precisely as an excellent connoisseur of the region. Jovanović is also a Macedonian (who speaks and writes Croatian excellently) with experience working in the Macedonian government, which is why he is known as a person with significant theoretical knowledge and practical experience. Therefore, we ‘checked in’ with him on all the hot topics.
Although everyone avoids the word ‘recession’ and instead uses ‘slowdown’, it is difficult to avoid the question of whether persistently high inflation will ultimately have to be extinguished by a recession, both in Europe and the USA.
– ‘Recession’ is a technical term that denotes a decline in economic activity over two consecutive quarters. Currently, it seems that almost all European countries will avoid it this year, primarily because the winter was mild, which is why they all recorded some small growth in the first quarter. The war in Ukraine has entered a phase of low-intensity warfare, so the stock markets have calmed down. The reopening of China after two years of zero COVID policy is also having a positive effect. However, the situation is far from ideal. Europe will barely record any growth this year. Inflation is not calming down at all, and central banks continue to raise interest rates. If the rates intensify, due to the announced Ukrainian offensive, the stock markets may become turbulent again. The energy issue is also unresolved in Europe. If next winter is cold, restrictions are possible. All in all, this will be another uncertain year.
Which is further contributed to by the still restrictive policies of all central banks. What are the estimates for this year, how much more can we expect in terms of interest rate hikes?
– The American FED and the European Central Bank have just raised their interest rates by 0.25 percentage points. This is the tenth increase by the FED since last year and the seventh by the ECB, marking the most aggressive tightening of monetary policy since the oil shocks of the 1970s. At the same time, there is an ongoing crisis with another bank in America, First Republic, which is larger than Silicon Valley Bank, and there are increasingly loud stories that other banks are in similar trouble. Therefore, more and more analysts estimate that the FED may soon stop tightening. Its governor Jerome Powell did not explicitly announce this at the press conference, but he stated that the tightening cycle may be nearing its end. On the other hand, the ECB is in a more difficult situation. Inflation in the EU in April was seven percent, which is higher than the March rate of 6.9 percent and significantly higher than the American inflation rate of five percent. ECB Governor Christine Lagarde has clearly indicated that they do not intend to stop. Therefore, it is expected that the ECB, unlike the FED, will continue to tighten.
Due to inflation, as expected. Namely, global inflation is targeted at around two percent, and it is assumed that we will return to that level only around 2025. But what about cumulative inflation and its impact on the economy? Compared to 2015, that is about twenty percent growth just in the EU?
– As our people say: What has been, has been. Prices will never return to the levels of a few years ago. This is a well-known economic law that they almost never fall. Those who remember inflation from the time of Yugoslavia, and even from the early nineties in Croatia, know well that inflation irreversibly raises prices. Therefore, it is now most important to take measures that will protect citizens from rising costs, i.e., to increase wages, pensions, and social benefits. If this is not done, people’s real income will be lower, which will reduce consumption and, indirectly, economic activity.
Will the rise in wages and/or support for citizens trigger an inflationary spiral or something similar? It’s not like we haven’t experienced that.
– It is an old thesis that wage growth during periods of inflation further stimulates inflation, i.e., opens an inflationary spiral. However, the latest studies show that this does not happen very often. The International Monetary Fund recently published a study on inflationary episodes in developed countries over the last sixty years. It is clear from them that when inflation is accompanied by wage growth, it very rarely causes further price increases, and in most cases, inflation stabilizes very quickly. A much greater danger currently comes from certain companies that exploit the situation and raise prices more than necessary. Economists call this phenomenon greedflation (a combination of the English words greed and inflation), and it is being talked about more and more. Recently, even Lagarde spoke about it.
A cycle of interest rate increases for clients has begun in banks. When we talk about corporate clients, many have already given up on investing, and thus on loans, and the quality of already approved loans is deteriorating. How badly can this affect the operations of banks?
– It certainly can, although NPLs (non-performing loans) are still at historically low levels throughout the region. Currently, it is evident that credit activity is slowing down everywhere. Credit growth has significantly slowed in the region in recent months and is currently at its lowest level in the last few years. This is likely to continue. On the other hand, the increase in interest rates has raised interest margins (the difference between interest on loans and deposits), which benefits banks as it increases their profit. However, the increase in interest rates, at least this aggressively, harms them more as it creates uncertainty. They may achieve record profits by the end of the year, but this will happen with considerable risks.
The entire interview can be read in the new printed and digital edition of Lider.
