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The COVID-19 pandemic, the energy transition from hydrocarbons
to renewables, and related government interventions are disrupting
markets around the world. Major shifts in household spending
patterns, working from home, fiscal and monetary stimuli, and
industry consolidation are contributing to market imbalances. With
demand persistently outpacing disrupted supply, prices are rising
to rebalance markets. Thus, the IHS Markit October global forecast
is characterized by lower near-term output growth, higher price
inflation, and earlier interest rate increases compared with the
September forecast.
After a 3.4% decline in 2020, world real GDP is projected to
increase 5.5% in 2021 and 4.3% in 2022, led by recoveries in
consumer spending and business investment. This forecast was
revised down by 0.1 percentage point in 2021 and 0.2 percentage
point in 2022, reflecting weaker outlooks for North America,
Western Europe, mainland China, and Japan. Global growth will
settle to 3.4% in 2023 and 3.2% in 2024 as pent-up demand is
satisfied, major economies reach full employment, and fiscal and
monetary policies tighten.
With some critical supply shortages and shipping bottlenecks
persisting well into 2022, inflation pressures will remain elevated
for several months and subside more gradually than previously
expected. Global consumer price inflation is projected to pick up
from 2.2% in 2020 to 3.7% this year, its highest rate since a 5.0%
advance in 2008. As agricultural and industrial commodity prices
retreat, consumer price inflation will ease to 3.2% in 2022 and
2.7% in 2023 and 2024. This month's inflation forecast was revised
up by 0.1 percentage point this year and 0.3 percentage point in
2022
COVID-19 concerns and worsening supply shortages will
delay some US growth beyond 2021.
The forecast of real GDP growth was lowered 0.3 percentage
point, to 5.4%, in 2021, and 0.2 percentage point, to 4.3%, in
2022. The revisions reflect more cautious consumer spending, fewer
light vehicle assemblies, and weak third-quarter exports. On the
positive side, a healthy report on retail sales in September
indicates resilience in spending as COVID-19 virus infections
decline. The forecast assumes passage of the Infrastructure
Investment and Jobs Act, but not the Build Back Better
reconciliation bill with substantial increases in social spending
and taxes. With sustained growth in consumer spending on services,
business investment, and exports, real GDP is projected to increase
2.8% in 2023 and 2.7% in 2024.
US labor supply is an emerging constraint on economic
growth.
Despite rising wages and record job openings, the labor
participation rate in September stood at 61.6%, well below its
pre-pandemic level of 63.3%. Workers have been slow to return for a
variety of reasons, including safety concerns, lack of childcare
availability, generous unemployment benefits, accumulated savings,
and early retirement. In the IHS Markit forecast, the US
unemployment rate falls from 4.8% in September to a low of 3.6% in
2023-24, putting upward pressure on wage rates. With the upward
revision to the inflation forecast, the Federal Reserve's
"lift-off" of the federal funds rate is moved forward six months to
March 2023.
Western Europe's mid-2021 growth spurt is fading, and
input shortages are constraining production.
With the easing of pandemic-related restrictions, real GDP
likely posted another strong growth rate in the third quarter, led
by consumer spending. However, the IHS Markit PMI™ surveys indicate
that shortages of electronic components and raw materials are
limiting production. Meanwhile, demand is cooling as rising
inflation squeezes household real incomes. After a 6.4% decline in
2020, eurozone real GDP should increase 5.0% in 2021, 4.0% in 2022,
and 2.2% in 2023. While Emerging Europe's growth prospects are a
bit stronger, near-term growth is threatened by new waves of
COVID-19 cases in several economies, including Russia, Romania, and
the Baltic States.
The acceleration in European consumer price inflation
will continue in the closing months of 2021.
The region's natural gas prices have soared, contributing to
increases in other energy prices. With inflation proving more
elevated and persistent than anticipated, the risk of second-round
effects on wages and unit labor costs has risen. Labor and skills
shortages are appearing in some countries, including the United
Kingdom, where Brexit has reduced immigration. In response to
inflation concerns, the Bank of England will likely become the
first major central bank to raise interest rates, by February 2022
at the latest. The European Central Bank will be more cautious, as
inflation expectations remain below 2%; its first interest rate
increase is expected in 2024.
Mainland China faces headwinds from the real estate
downturn and power shortages.
Real GDP growth slowed from 7.9% year on year (y/y) in the
second quarter to 4.9% in the third quarter, as containment of
COVID-19 outbreaks in August took a toll on retail sales. A further
deceleration in real GDP is expected in the fourth quarter.
Industrial production growth subsided to 3.1% y/y in September from
5.3% in August, with energy-intensive goods such as metals,
chemicals, and construction materials hit hardest by power
restrictions. Coal-based thermal power, which accounts for 70% of
the country's electricity generation, has been constrained by
Beijing's decarbonization policies and cessation of coal imports
from Australia in 2021. Meanwhile, the government's deleveraging
campaign targeting property developers is deflating real estate and
construction activity. Mainland China's real GDP growth is
projected to slow from 8.2% in 2021 to 5.7% in 2022 and 5.5% in
2023.
Asia Pacific economies are rebounding from third-quarter
setbacks.
IHS Markit economists estimate that real GDP contracted quarter
on quarter during the third quarter in Australia, Indonesia,
Malaysia, the Philippines, Thailand, and Vietnam. With new COVID-19
cases diving from recent peaks, helped by rapidly rising
vaccination rates, Asia Pacific is poised for a strong rebound in
late 2021 and early 2022. The recovery of manufacturing production
will help to gradually ease global supply-chain disruptions. After
a 1.0% decline in 2020, the region's real GDP is projected to
increase 6.0% in 2021 and 4.8% in 2022.
Pandemic-related supply shortages, shipping delays, and the
first storm of the energy transition are driving up prices and
constraining global economic growth. Some of these disruptions will
persist through 2022. Investment in new capacity is a medium- or
long-term solution to supply shortages, but in the near term a
cooling of demand growth will be necessary to bring markets into
balance. With inflation continuing to surprise on the upside, the
global economic expansion will proceed at a diminishing pace in
2022-23.
Posted 21 October 2021 by Sara Johnson, Executive Director – Economic Research, S&P Global Market Intelligence
