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The global economy made the transition from recovery to
expansion in 2021 amid ongoing turbulence from the COVID-19
pandemic. An uneven economic expansion generated supply/demand
imbalances, leading to major supply chain disruptions and rising
inflation. In 2022, businesses will navigate multiple transitions
in the global economy. These include the transition from pandemic
to endemic COVID-19, the shift from fiscal policy stimulus to
restraint, rising interest rates and tightening credit conditions,
and a bumpy energy transition from hydrocarbons to renewables. Amid
these transitions, global economic growth will likely slow in 2022,
as some major economies approach or reach full employment.
Geopolitical conflicts will continue to pose risks to the
outlook.
1. New waves of COVID will not derail the recovery as it
transitions from pandemic to endemic
The resurgence of COVID in fall 2021 was initially concentrated
in countries with below-average vaccination rates. The subsequent
spread in new cases and the emergence of the Omicron variant signal
a transition from pandemic to endemic. As COVID-19 continues to
spread around the globe, the new variant will trigger government
responses that will again be primarily focused on avoiding stress
in the health system and encouraging vaccination. While general
lockdowns will be avoided, service activities will remain
constrained until effective and affordable cures become available
and make further restrictions unnecessary. The economy will not be
derailed in 2022, but the pace of growth will slow.
2. Supply chain challenges will continue to disrupt key
industries, but upward pressures on prices will abate. Wage gains
will be strong but prove temporary, with inflation sequentially
diminishing starting in the second half of the year
Shipping disruptions, supply stickiness, and energy price
increases will continue to exert upward pressures on prices in the
first half of 2022. Logistics bottlenecks will only be resolved
later in the year, as demand for goods moderates and traffic
normalizes, while increases in oil production by OPEC+ countries
and the US and in natural gas production by Russia alleviate
pressures from energy prices. The power shortages that hampered
industrial production in mainland China this past fall should be
resolved in 2022, but production limits on energy-intensive
industries will stay in place as the economy embarks on the road to
carbon neutrality. Wages will respond temporarily to labor market
pressures in the US and Europe with little-lasting effect on
inflation. Year-on-year inflation rates will thus slow by the end
of 2022.
3. Central banks will continue monetary tightening at varying
rates, with market conditions worsening for riskier asset classes
but avoiding major "taper tantrums"
Within 2021, the Federal Reserve tapered its asset purchases
with the ECB, previously having marginally scaled back its
extraordinary monetary measures. Several economies either already
have substantially raised rates (e.g., Brazil) or look close to
doing so (e.g., the UK), and overall
policy direction is moving toward a global rate-tightening
phase. High inflation, progress with economic recovery, and further
progress in controlling the COVID-19 pandemic—even if this
proves uneven—will encourage central banks to move toward
tighter monetary policy in 2022.
4. The withdrawal of pandemic-related emergency support means
fiscal tightening worldwide
Fiscal tightening is happening as central banks reduce their net
asset purchases. Advanced economies are still running large
deficits, but as these deficits narrow, the public sector will
often become a restraint on economic growth. In the US, for
example, government spending as a share of GDP is significantly
falling in 2022, after two years of hefty increases due to
pandemic-related emergency support measures. In Europe, fiscal
support is also being progressively unwound. We estimate that the
aggregate budget deficit for the eurozone will fall by around
EUR300 billion in 2022. Even so, the eurozone deficit will still be
well in excess of 3% of GDP next year and still much higher in many
of the member states with public debt-to-GDP ratios of well above
100%. Fiscal consolidation will remain a challenge for many
European countries well beyond 2022.
5. The pace of the global expansion will slow, with regional
divergence to continue
The rate of expansion will moderate globally as economies
approach potential. However, once supply-side disruptions
ease—which will happen unevenly across regions—and barring
negative surprises from new COVID-19 variants, growth will
temporarily pick up, with the more industrial and trade-sensitive
economies or regions to benefit most. Crosswinds from various
factors, including the evolution of supply disruptions and COVID-19
trends, will nonetheless complicate growth patterns in some
regions.
6. US growth will slow in 2022 to a still above-trend pace
despite sharply waning fiscal stimulus, keeping labor markets
tightening and interest rates on the rise
Growth will slow from a significantly above-trend pace to a
modestly above-trend rate, as a result of waning effects of the
prior stimulus, withdrawal of monetary accommodation, the
satisfaction of pent-up demand, and a transition from pandemic to
endemic. The composition of growth will shift from final sales
towards inventory rebuilding, and from purchases of goods to
purchases of services. Core Inflation will subside towards 2% as
price pressures ease with the gradual dissipation of supply-chain
disruptions. However, an initial upward realignment of wages in
some areas will give way to a more fundamental and persistent
pressure on wages and prices as labor markets broadly continue to
tighten, limiting the decline in inflation. The Federal Reserve
will complete its tapering of asset purchases in the spring and
soon thereafter begin raising its policy rate. President Biden's
"Build Back Better" Act is likely to be enacted, but with only a
modest impact on the near-term economic outlook. The Omicron strain
of the coronavirus presents downside risks to prospective
growth.
7. Mainland China will avert a housing market crash and a
financial crisis but will grow below potential
The government will be able to prevent a housing market crash by
fine-tuning its tightening policies regarding the real estate
market to stabilize housing demand. Chinese property developers'
liquidity crunch will unlikely trigger a financial crisis, due to
mainland China's domestically oriented financial intermediation,
capital control, and state command of the banking sector. However,
the economy will grow below its pre-pandemic 6% potential growth
rate, owing to the government's firm stance on the zero-COVID
policy, a continuation of the property sector deleveraging drive,
and increasingly intrusive interference in the private sector.
8. A widespread emerging market debt crisis remains a low
probability
Emerging market borrowing costs will rise but from historically
low levels. With few exceptions, this will not unsettle markets.
Many countries have extended their debt profiles and covered
near-term repayment needs through liability management programs,
reducing the risk of liquidity-driven defaults, while using
favorable market conditions to prop up their reserves and
benefiting from the recent IMF allocation of additional special
drawing rights (SDRs). Commodity and energy-oriented emerging
market countries will enjoy expanded export and fiscal earnings,
given higher global natural resource price levels. Although some
countries face ongoing elevated debt sustainability risks, notably
Turkey, Tunisia, Argentina, Lebanon, Ethiopia, and Zambia, others
enjoy greater resilience, making a widespread global
emerging-market crisis—like in 1998—unlikely. Pockets of
risk will start emerging in Latin America, where political changes
and growing policy uncertainty will aggravate volatility.
9. Momentum behind ESG issuance will continue to grow, but
policy support to accelerate the energy transition will be
mixed
Given the greater political and public focus on climate change,
we expect more investment managers to develop ESG-focused
investment funds and to increase their scrutiny of the
environmental nature of their holdings. More emphasis on ESG
disclosure, both by investing entities and issuers, will add to
existing momentum at sovereign and supranational levels. A further
positive indicator has been an apparent recent increase in
Greenium—the cost savings from using a green bond
format—encouraging more borrowers to accept the upfront and
ongoing cost of establishing and maintaining ESG frameworks. We
expect some policy movement, however, implementation will face
hurdles, so the policy changes will not have much material effects
on the economy in 2022.
10. Geopolitical tensions will continue to escalate
As geopolitical tensions continue to escalate, this increases
the risk that these uncertainties could create episodes of
volatility in regional financial markets and currencies. The
downside risk of a more significant confrontation or crisis that
temporarily disrupts shipping and commercial aviation also
increased, as has the risk of economic response measures. These
tensions will translate into stepped-up military expenditures among
the major powers in both regions.
