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With inflation at a fever pitch, central banks around the world
are raising interest rates with new urgency, hoping to cool
inflation by slowing growth of aggregate demand and achieving a
closer balance with supply. Meanwhile, Russia's war with Ukraine
and recent lockdowns in mainland China have further disrupted
supply chains, adding to cost pressures. With high inflation
shattering consumer and investor confidence, forecast probabilities
are leaning closer to recession. In Europe and North America,
prospects for a "soft landing" are dimming.
Financial market turbulence is another sign of the
shifting economic climate.
Global equity markets have moved into bear territory in
mid-June, with the MSCI World Index and the S&P 500 Index each
falling 23% year to date. In June, long-term bond yields have risen
sharply in anticipation of future increases in central bank policy
rates. Capital markets remain open, but financing costs are rising
for businesses, consumers, home buyers, and governments. The year
ahead will bring a more difficult environment for builders and
capital good producers. Investor flight to safety would likely mean
continued strength in the US dollar and elevated risks for emerging
markets that depend on capital inflows to finance trade and fiscal
deficits.
Will central banks succeed in cooling
inflation?
With perseverance, monetary policy can be effective in anchoring
inflation expectations and preventing an upward spiral in prices
and wages from taking root. Absent new supply shocks, the outlook
is sanguine. Our June forecast calls for global consumer price
inflation to ease from 7.0% in 2022 to 4.0% in 2023 and 2.7% in
2024. This deceleration in prices reflects a gradual resolution of
supply chain disruptions along with softening demand. Industrial
and agricultural commodity prices are expected to retreat from
recent peaks over the next two years, although most prices will
remain significantly above 2019 pre-pandemic levels. As consumer
demand shifts from goods to services, a moderation in goods price
inflation will be partially offset by a pickup in services price
inflation.
Energy prices will be pivotal in the inflation outlook,
given the key role of energy as an input acrossgoods and services sectors of the economy.
Lean inventories, limited spare capacity, and changes in supply
dependencies following Russia's invasion of Ukraine will add to
price volatility, especially during seasonal peaks in demand. Our
next forecast will incorporate the EU ban on about 80% of its
Russian oil imports, along with continued sanctions on Iranian oil.
As a result, the average price of Brent crude oil will be higher
than the current forecast assumption of USD113/barrel in the second
half of 2022 and USD100/barrel in 2023.
Our June forecast calls for global real GDP growth to
slow from 5.8% in 2021 to 2.9% in 2022 and 2023,slightly below potential.
The easing of pandemic-related restrictions and a revival in
service sectors (including travel and tourism, recreation, and
arts) is a key support to growth. However, the fallout from
tightening financial conditions is likely to lead to a downward
revision in the global growth outlook in the next forecast. The
soft landing anticipated in early June will likely give way to a
bumpier ride.
The United States faces a growth recession and rising
unemployment.
The US Federal Reserve raised its policy rate by 75 basis points
at its mid-June meeting and signaled its determination to return
inflation to 2%, acknowledging it expects unemployment to increase.
Forecasts by Federal Open Market Committee participants suggest
that the federal funds rate will be raised another 175 basis points
in 2022 and 25 basis points in 2023, resulting in a target range of
3.50-3.75%. This is 50 basis points higher than assumed in our
forecast of early June. Since the forecast's release, new data on
retail sales, housing starts, and inventories have prompted a
downward revision in our tracking estimate of annualized real GDP
growth in the second quarter from 2.4% to 0.8%. Although household
finances are generally in good shape, high inflation is eroding
real incomes and making households more cautious about spending.
The boom in housing markets is subsiding, and businesses are likely
to trim capital spending plans for the year ahead. Real GDP growth
is projected to slow from 5.7% in 2021 to 2.5% in 2022 and 1.8% in
2023 and 2024, with risks weighted to the downside. With real GDP
growth running below potential, the unemployment rate will rise
from 3.6% in May to a high near 5.0% by 2025.
Higher energy costs could push Western Europe into
recession.
Our June forecast already incorporates mild second-quarter
contractions in real GDP in the UK, Italy, Spain, and the
Netherlands. With inflation surprising on the upside, central banks
are stepping up the pace of tightening, with the European Central
Bank now expected to start raising interest rates in July. The
fallout of the Russia-Ukraine war deflated consumer and business
confidence. Eurozone real GDP growth is projected to slow from 5.4%
in 2021 to 2.5% in 2022 and 1.5% in 2023. The prospect of further
disruptions to energy supply driving up prices remains a downside
risk.
Mainland China's economy begins to recover from COVID-19
lockdowns.
Mainland China's economic downturn moderated in May as
industrial production and exports turned up while services and
retail sales remained in contraction. The government's dynamic
zero-COVID policy will remain in place through 2022, preventing a
return to normalcy and limiting the effectiveness of economic
stimulus. The property market remains in recession, and declining
land sales are hurting local government finances. Real GDP growth
is projected to slow from 8.1% in 2021 to 4.2% in 2022 before
picking up to 5.2% in 2023.
The Russia-Ukraine conflict becomes a war of
attrition.
Russia's invasion of Ukraine on 24 February has transformed the
geopolitical landscape. Our forecast anticipates that Russia will
continue to wage a war of attrition in Donbas, making slow
advances. The outcome of a high-intensity but indecisive war in
Donbas could be a frozen conflict with some territories in Ukraine
remaining under de facto Russian occupation. Through sanctions,
trade policies, and private investment decisions, Russia's
international trade will be limited and its economy will undergo a
restructuring to increase self-sufficiency. Russia's real GDP is
projected to fall 10.6% in 2022 and 1.1% in 2023 before beginning a
slow recovery. After a 44% collapse in 2022, Ukraine's real GDP is
expected to rebound 28% in 2023 and 16% in 2024 as reconstruction
proceeds with the support of substantial aid from Western
allies.
Bottom line
The persistence of high inflation is prompting central banks to
tighten policies more aggressively to cool demand amid ongoing
supply disruptions. While the global economic expansion is
projected to continue at a diminished pace, the risks of a
recession are rising.
Posted 22 June 2022 by Sara Johnson, Executive Director – Economic Research, S&P Global Market Intelligence
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.