Analysis of developments in EU capital flows in the global context (2022). Lingering uncertainty and the return of inflation

Summary:

Russia’s aggression against Ukraine in February 2022 acted as a cold shower on a world economy that was quickly recovering from the pandemic. In the course of 2022, growth forecasts were revised downwards several times due to soaring energy and food prices, and most central banks tightened their monetary policy stance. Despite the less benevolent environment, FDI rebounded in the first half of 2022 after about five years of decline.

Similarly, portfolio investment recovered driven by an increase in China’s position as a net investor, while the euro area experienced a substantial decline in net flows. The US maintains its historically dominant position, with large portfolio inflows and outflows. Higher interest rates and a flight to safety appear to have boosted inflows into the US across both asset classes. The overall picture, compared with the period of extraordinary movements in EU capital flows during the first half of 2022, suggests we’re now transitioning back towards the ‘normalisation’ of capital flows. 

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