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GLOBAL ECONOMIC OUTLOOK FOR 2022 Economist Keith Wade gives his views on the outlook for the global economy in 2022 when growth is expected to cool after a very strong 2021.
THE emergence of the Omicron Covid variant has reminded us of the uncertainties which remain around the global pandemic. Despite these, we expect 2022 to be another good year for growth as the global economy continues its recovery. We do, however, see growth cooling following an exceptionally strong 2021, as the massive support offered by governments and central banks during the pandemic’s initial stages begins to fade. Inflation should moderate, but policymakers and investors face a difficult period in the interim. Our forecast is that 2021 global GDP growth will be 5.6%, to be followed by 4.0% growth in 2022. We see global inflation at 3.4% for 2021 and rising to 3.8% in 2022. The economic recovery following the pandemic has differed from economic recoveries of the past. This has thrown up unanticipated problems in supply chains which have been beset by bottlenecks. We’ve also seen issues with labour markets, where companies have struggled with worker shortages. Bottlenecks and shortages have pushed inflation and wage rates higher than expected.
The unbalanced nature of the recovery can be seen in real (afterinflation) retail sales in the US, which are now more than 10% above their pre-pandemic levels. In contrast, real service sector spending remains some 2% short of where it was before Covid-19. The impact of bottlenecks is apparent in the recent loss of momentum in retail sales volumes. This loss primarily reflects the impact of higher inflation as retailers faced with restricted supply have passed on their own cost increases. In nominal terms, sales have continued to forge ahead and are some 20% above pre-pandemic levels. Higher inflation reflects restricted supply and strong demand. While central banks cannot affect the former (speed the delivery of cargo, say, or, in the case of renewable energy, make the wind blow harder), they can restore balance given they have the tools to address the strength of demand. GOVERNMENT SUPPORT TO FADE We expect the withdrawal of emergency levels of support by central banks and governments to play an important role in shaping
economic activity in 2022. The massive fiscal stimulus policies (government spending and taxation policies designed to support economies over the short term) in response to the pandemic are already winding down in the US and UK. Although government spending will remain strong, overall fiscal policy will be less supportive in 2022. This should not be a surprise after the “shock and awe” fiscal largesse of 2021. In the US the Bipartisan Infrastructure Deal will start up next year and the larger Build Back Better package currently winding through Congress should help (if it gets through the Senate). The overall “growth impulse” from fiscal policy however will be less than in 2021. It’s a similar story in the UK where corporate and income taxes are set to rise. In contrast, the Eurozone stands out as fiscal spending is expected to remain strong due to Europe’s recovery plan. Stimulus is slightly less than in 2021, but still significant. Meanwhile, China is expected to keep fiscal stimulus going in 2022 through higher local government borrowing, but some of it will be due to banks being
