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No one would have been able to say that "today, we are better
than where we were a year ago." As the not-very-distant memory of
2020 lingers in our minds, savings were obliterated, no vaccine in
sight, cities under lockdown and schools canceled, an uncertain
economic future, and no clear direction from the governments around
the world. But with the acceleration of vaccine rollout, as well as
the policy support from governments and central banks, people are
starting to get a sense of increased security for both the overall
economic environment as well as their personal health
conditions.
As the global economy recovers, inflationary pressures are
building, and price increases are moving downstream. In several
markets, strengthening demand is causing more stress on
pandemic-constrained supply and driving up prices. Our Materials
Price Index (MPI) has surged 40% since mid-November 2020, reaching
its highest level since early 2014. The inflation pressures are
coming from all sides, including the disruption in the supply
chain, resilience in consumer demand, and most importantly, support
from governments and central banks.
First, suppliers have been playing catch up to the urgency of
demand while navigating supply shortages and port congestions
around the world. Global supply chains have remained disrupted in
the second year of the pandemic.
Second, governments are rolling out massive fiscal support while
central banks are pumping liquidity into the markets through zero
interest rates and asset purchases. All these policy efforts could
lead to overheating.
Third, household savings have surged in the past year, as
consumers have been accumulating greater savings from governments'
stimulus payment, tightening their belts in response to economic
uncertainty, but also due to the simple fact that social isolation
also meant isolating our wallets. As the pandemic subsides and
pent-up demand for services is released, these savings, as well as
substantial gains in equity and housing asset values, could drive a
faster resurgence in consumer demand, therefore inflation, than
forecast.
Here we provide two possible outlooks in our scenario
analysis.
Baseline outlook: Moderate global growth and inflation
with regional variations
World real GDP is projected to advance 5.1% in 2021 and 4.3% in
2022 before settling to a more sustainable 3.1% growth pace in
2023-25. The United States and mainland China are leading the
global expansion, while Europe and Latin America are lagging as
countries struggle to contain the COVID-19 virus. As the global
economic expansion gains momentum, year-on-year (y/y) price
inflation will pick up, and increased commodity prices will be
passed downstream through supply chains. Global producer prices
will shift from a 1.0% decrease in 2020 to a 4.5% increase in 2021,
while global consumer price inflation picks up from 2.1% in 2020 to
2.8% in 2021.
As supply conditions improve, pressures should ease in shipping
rates and prices of lumber, iron ore, steel sheet, copper, and
basic chemicals. Our MPI, which soared 58% y/y in Q1 of 2021, is
projected to decrease 16% through Q1 of 2022. Crude oil prices will
settle in the USD 60-65/barrel range as OPEC+ nations increase
production to defend market share. The semiconductor market will
remain tight into 2022 with significant upside potential for prices
of commodity-grade chips. In most industries, however, available
global capacity looks sufficient to meet projected demand in 2021
and 2022 if operating rates improve.
Agricultural commodity prices should follow a trajectory similar
to the MPI, as US farmers plant record acreage of corn and soybeans
in 2021 to replenish stocks and hence drive prices down. After a
26% y/y increase in Q1 of 2021, our Soft Commodity Price Index is
projected to fall 12% in the next four quarters. With prices of
industrial and agricultural commodities retreating from current
levels, global consumer price inflation will ease to 2.4% in
2022.
The United States will lead a gradual acceleration in global
prices in 2023-26. The unemployment rate will reach a low of 3.5%
in mid-2023, triggering accelerations in wages and prices. Consumer
price inflation will move above 2.0% in 2024 and reach 2.5% in
2026. On the other hand, inflation risks will remain low in both
China and Europe. In China, consumer price inflation is projected
at 1.5% in 2021. A rebuilding of pork supplies— depleted in
2020 by African swine flu— will restrain food prices. In
Europe, core inflation should remain relatively low due to sluggish
recoveries, slack labor markets, and subdued inflation
expectations.
A "higher inflation" scenario
Using our Global Link Model, we developed
an alternative scenario in which more resilient consumer demand and
prolonged supply bottlenecks lead to a sharper acceleration in
wages and prices than in the baseline forecast. This will
inevitably lead to a more aggressive tightening of monetary policy
by major central banks, thus cool down global economic growth in
the long run.
In this scenario, global consumer price inflation averages 0.6%
above the baseline inflation rate in 2022-25, and 0.5% higher in
2026-30. The new norm of inflation will become 3.0-3.5%, rather
than 2.5-3.0%. By 2030, the global price level is 5.6% above its
baseline path. While North America and Europe generally follow the
global pattern, Latin America should experience more effects of
inflation (8% above their baseline level in 2030), and Asia-Pacific
less (only 4% above the baseline).
Global real GDP growth is nearly 6% in 2021, or 0.8% above the
baseline forecast because of a quicker rebound in consumer
spending. The trend is reversed in 2022, however, and growth
becomes slower than in the baseline forecast through 2030. By the
end of the decade, global real GDP is 1.0% below the baseline
forecast.
The rise in consumer prices is a steady drain on household
purchasing power. After an initial spurt in 2021, growth in real
private consumption trails the baseline pace. The level of real
consumer spending falls below its baseline path in 2024 and is 0.9%
below the baseline forecast by 2030. US consumers are able to
maintain their spending thanks to accumulated savings and gains in
household net worth during the pandemic. In contrast, real spending
by European households is 2.3% below the baseline forecast by
2030.
Conclusion
We believe that as the global economy recovers, inflation will
pick up at a moderate pace. This is especially true as global
competition, supply responses, and well-anchored long-term
inflation expectations should limit the magnitude and duration of
the price increase. But this does not mean we should not consider
the economic implications if the inflation were higher than
expected. It will entail a quicker economic rebound, which burns
out faster due to central banks tightening monetary policy at a
faster pace.
Posted 13 April 2021 by Derek Liu, Director of Economist Solutions, Economics & Country Risk, S&P Global Market Intelligence and
Jonathan Ablett, Executive Director, Global Economic Modelling Economics & Country Risk, S&P Global Market Intelligence and
Sara Johnson, Executive Director – Economic Research, S&P Global Market Intelligence
