December 2022
While 45k attended COP27 in Egypt, the summit was largely overshadowed by the energy crisis, higher inflation, and geopolitical tensions.

Takeaways from COP27

Loss and damage fund

Despite that, COP27 ended with a landmark agreement to create a fund to compensate the developing world for ‘loss and damage’ caused by climate change. At the same time, the needle barely moved on emissions pledges. That’s surprising because the opposite usually occurs—a host of new (if insufficient) emissions pledges, coupled with a lack of climate finance.

However, the deal comes with big question marks. No sums of money were committed, and the details were left to be worked out at next year’s COP28 in the UAE. Nevertheless, it marked a major shift in the attitudes of wealthy nations, who have dodged calls for climate reparations for decades.

Indeed, in the run-up to the Egyptian summit, the US climate envoy, John Kerry, had dismissed the idea as unrealistic. Mr Kerry later said Washington was “pleased” to support the deal after it became clear there would be no legal liability.

Adaptation finance for developing countries reached US$29bn in 2020, an increase of 4% from the previous year, according to OECD data. But they would need between US$160-340bn a year by 2030, according to the UN Environmental Programme (UNEP).

 

 

Separately, at the G20 summit in Bali, wealthy countries led by the US and Japan agreed to a US$20bn finance deal to Indonesia to help speed up its transition to renewable power. It includes $10bn in public funding and a further $10bn from the private sector.

For its power sector, Indonesia has pledged to cap carbon dioxide emissions at 290Mt by 2030 and reach net zero by 2050. Indonesia will also aim to generate 34% of its electricity from renewables by 2030, up from around 11%. The country generates 60% of its electricity from coal and was the world’s ninth-biggest carbon emitter in 2021.

Last year, the US and European countries pledged US$8.5bn to help South Africa retire coal plants and shift to renewable energy. Similar talks are also underway with Vietnam, Senegal, and India.

 

The 1.5C goal still hanging on for dear life

While progress was made on climate justice, the same cannot be said for decarbonisation. Indeed, in the final text, references to the more ambitious goal of limiting warming to 1.5C were reduced almost to the point of non-existence.

Furthermore, despite apparent support from the US, and the EU, calls to phase down the use of all fossil fuels (not just coal) was scuttled by petrostates like Saudi Arabia and Russia. Annalena Baerbock, the German foreign minister, expressed frustration at “being stonewalled by a number of large emitters and oil producers.” That suggests a shift in climate geopolitics from between rich and poor countries, to between fossil fuel exporters and importers.

The world is on track to warm by 2.4-2.6C by 2100, based on the implementation of current emissions pledges by 194 countries that account for more than 90% of all greenhouse gas emissions, according to the UNEP. We expect warming of 2-3-2.5C by the end of the century.

The updated targets announced by countries this year would shave less than 1% off projected 2030 emissions. That's a major shortfall from the 45% reduction required to limit global warming to 1.5C.

The world has already warmed by at least 1.1C from pre-industrial times, scientists have concluded. Every fraction of a degree of additional warming is expected to make extreme weather events more common and intense. 

 

Has Inflation Peaked?

This year’s white-hot inflation has likely peaked with headline price growth expected to ease in the coming months. Factory gate prices, shipping rates, and commodity prices have all begun to cool off from record highs.

Global shipping rates have returned largely to pre-pandemic levels. A 20-foot container from China to Northern Europe now costs around US$1.5k, down from US$8k at the start of the year.

The UN FAO food price index slowed to an annual rise of 2% in October, down from its apex of 40% in May 2021. Meanwhile, AME’s European composite gas price averaged US$34.52/MMBtu in October, down 32% on-month, on full reservoirs, mild weather, and efficiency measures.  

US consumer price inflation has been easing for several months after surging to a 41-year high in June. The country’s inflation growth slowed to a 7.7% gain in October, down from 8.2% in September. US employers posted 10.3m job vacancies in October, down from 10.7m in September, in a sign of a cooling labour market.

The EU is finally catching up. The bloc’s inflation fell for the first time in 17 months in November, to an annual increase of 10%, down from a record 10.6% in October. Energy price growth moderated to 34.9%, down from 41.5% in October. The fall will ease the pressure on the central bank. We expect the ECB to raise interest rates by 0.5% this month, down from 0.75% at its last two meetings.

Federal Reserve Chair Jerome Powell has laid the groundwork for a slowdown in monetary tightening as soon as this month. As a result, we continue to expect a 0.5% interest rate hike at the December meeting, down from 0.75% at each of the last four meetings.  

Europe’s energy crunch will mean the region’s inflation will take longer to fall than in the US. While prices are expected to come down in 2023, we expect Eurozone inflation of 6.2%, compared to 3.4% in the US.

But while the gas squeeze has eased, we expect the respite to prove temporary on dwindling Russian supplies. We expect the European composite gas price to average US$46.75/MMBtu in 2023 and US$41.39/MMBtu in 2022. This is compared to the pre-pandemic average (2015-2019) of US$6/MMBtu.

G20 headline inflation is expected to come in at 8.2% in 2022, soaring from 3.8% in 2021. A moderation to 6.6% is expected in 2023, as demand eases from higher interest rates while supply bottlenecks ease.

 

Economic Expectations

In 2022, global economic growth will come in at 3%, weighed down by tightening monetary conditions to rein in soaring inflation, Europe’s energy crisis and China’s slowdown.

In 2023, global growth will slow to 2.2% as financial tightening, lower real incomes, weak consumer confidence and high energy prices weighs on consumption and investment.

AME expects US economic output to come in at 1.5% in 2022, on reduced household purchasing power and monetary tightening. In 2023, we expect growth of 0.5%.

We forecast China to grow 3.2% in 2022, as snap Covid-19 lockdowns and property sector woes hit growth. In 2023, we expect growth of 4%, driven by policy measures worth up to 2% of GDP to strengthen infrastructure investment and a rebound from Covid restrictions.

The Eurozone will grow 3.1% in 2022, as high energy and food prices curbs consumer spending and industrial output. In 2023, the region’s growth will slow down to just 0.3%, as supply shocks worsen. The German economy will be hit particularly hard given its reliance on Russian gas, contracting by 0.7% in 2023.