‘The easy part is over’: Uncertainty hovers after global economy rebounds

The global economy has rebounded from the historic recession caused by the Covid-19 crisis better than many economists expected in 2021, but faces a tougher path ahead in the year ahead. warned forecasters.

Progress will depend on how virulent the pandemic is, how easily inflation is brought under control and whether the economic damage is dispersed across countries and industries, they said, warning of a growing risk of miscalculations. monetary and fiscal policy as governments and central banks seek to respond.

“The easy part of this uneven global economic recovery appears to be over,” said Daan Struyven, senior global economist at Goldman Sachs.

Janet Henry, HSBC’s chief economist, said the outcome was unlikely to be a “Goldilocks” scenario – neither too hot nor too cold.

Most economists agree that the backdrop in most countries of a strong recovery combined with high inflation will make it difficult to balance supply and demand.

Simon MacAdam, senior global economist at Capital Economics, said while headline inflation rates would certainly fall, there was likely to be lingering underlying pressure on prices due to tight labor markets, particularly in the states. United States, and “product shortages and high transportation costs”. ” in most countries.

Nomura economists are confident that monetary authorities will get inflation under control, but that will come at a cost. “At the end of 2022, we see a very different backdrop, with stagnation being a bigger risk than stagflation,” they warned.

The OECD expects global output growth to slow from 5.6% in 2021 to 4.5% this year, with inflation rising from 3.5% to 4.2%, although the peak occur in the first months of the year.

Economists agree that the main uncertainties about the outlook for the year ahead stem from what has happened over the past 12 months. A better-than-expected recovery, accompanied by a shift in the pattern of spending from services to goods, drove prices higher and showed that consumers’ willingness to buy exceeded businesses’ ability to supply.

Coronavirus vaccines allowed for a rapid easing of restrictions and stimulus measures propelled consumer spending, allowing the world to end the year “in a better place than we might have expected a year ago. year,” Henry said.

What happens in 2022 will depend on three interrelated forces.

Global GDP is expected to increase Current and previous projections of global GDP (Q4 2019=100) G2071_21X

The virus

The severity of the pandemic is influencing both the willingness of individuals and businesses to spend and government restrictions on mobility, which are once again tightening across Europe.

“The global economy continues to be distorted by the ups and downs of the pandemic,” said Jay H Bryson, chief economist at Wells Fargo. Although households, businesses and countries have adapted much better to the waves of coronavirus, the latest variant of Omicron shows that it still has the power to damage consumer and business confidence and economic activity. .

Tamara Basic Vasiljev, senior economist at Oxford Economics, noted that Omicron had undermined consumer sentiment around the world in recent weeks. But with sentiment still at relatively high levels and household finances strong, she does not expect the hit to economic activity to be significant globally.

“The global economy will manage to navigate the choppy waters presented by the Omicron variant,” she said. The big uncertainty is whether there will be more waves to come.

Inflation

The second major uncertainty comes from the imbalance between global supply and demand, which has created inflation in 2021.

Economists expect the headline rate to fall, partly because of the statistical effect of last year’s high rates on the annual calculation, and because oil and energy prices are not expected to increase further.

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The question is whether price pressure will ease enough for central banks to avoid taking drastic measures to bring down inflation, which could put the brakes on the recovery.

“As the year progresses, [supply] shortages should ease and their inflationary effects should also ease, albeit with some lag,” said MacAdam of Capital Economics. However, he worries that the US labor market is overheating and that the Federal Reserve could err on the side of being too cautious.

“We doubt that the magnitude of the tightening announced by the Fed will be sufficient to bring underlying inflation down to 2%,” he added.

Unequal damage

The third big problem for the global economy in 2022 stems from differences between countries and industries in their ability to recover from the crisis.

Spain, Thailand and Indonesia are furthest behind in the expected trajectory of their economies due to the pandemic, with Turkey, Taiwan and China the furthest ahead, according to Goldman Sachs research.

Output in Spain, Thailand, Indonesia and the UK remains weak Real GDP (Q3 2021, forecast) Percentage change from Q4 2019 and Percentage change from trend based on 2017 average growth -19 G2071_21X

Much of this, Struyven said, was due to the extent to which countries were exposed to sectors that were affected by or benefited from shifts in demand; for example, the manufacturing sector saw very high demand while sites dependent on travel and tourism suffered severe damage.

“Services where spending remains particularly depressed in many economies are generally either associated with high virus risk, such as spectator events and international travel, or related to office work, such as ground transport or dry cleaners said Struyven.

For countries specializing in these services, the gains would depend on “greater medical improvements” to fight the pandemic.

Because of these fundamental uncertainties, the path of monetary and fiscal policy could result in either renewed inflationary pressures if too much stimulus is delivered, or a plunge into stagnation if the recovery is insufficiently sustained.

According to HSBC’s Henry, “things are still very far from normal”.

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