What’s next for the global economy in 2022?
2021 is set to go down in the economic annals as one of exceptional growth. An improving health situation, the wide-spread relaxing of COVID-19 restrictions, and ongoing aggressive policy support have all helped the global economy recover from its pandemic-induced slump of 2020.
So much so that analysts at Barclays Private Bank now expect the global economy to expand by a super-charged 6.1% in 2021 (see Figure 1), far better than our original 4.7% forecasts at the start of the year. It all adds up to the strongest post-recession recovery since the Great Depression of 1929.
When you consider that the average annual global growth rate was just 2.7% between 2000 and 2019, the enormous doses of fiscal and monetary “medicine” – allied to the biggest vaccination drive in human history – have proved more than successful in allowing economies around the world to stage a robust post-pandemic rebound.
But the next challenge for authorities is how quickly they can withdraw these stimulus measures while keeping their economies in rude health. Other risks might derail the recovery, too; the path of the pandemic is still unclear, inflation appears to be more ingrained than many hoped, growth in some key regions is slowing, and interest rate rises are back on the agenda.
Our 2022 forecasts
As we look towards 2022, we continue to anticipate above-trend global growth as the recovery phase plays out – with our global growth forecasts (see Figure 1).
While the world is likely to grow robustly in 2022, we do believe the peak of the pandemic recovery has passed. The fading of the one-off boost from economies reopening, and reduced impact from fiscal support, will weigh on year-on-year comparisons.
Victory from COVID-19 is far from assured, too, although we do believe the virus will become endemic over time. Advanced economies have surged ahead with their vaccine drives, although many emerging and developing nations may continue to feel the effects of COVID-19 for longer due to vaccine supply problems.
There are also clear signs that the world’s two largest economies – the US and China – have already achieved peak growth rates in terms of the recovery. That said, expected annual growth of 3.8% for the US is still highly respectable. Meanwhile, China’s zero-COVID strategy, moderation in credit growth, and energy shortages all lead us to believe that growth will ease to 5.3% in 2022, from 8.0% this year.
But we see others picking up the slack in 2022, namely Europe and India. After a slow start to 2021, momentum in European activity has tangibly accelerated over the past few months. Progress on vaccinations, rebounding consumer spending, the accommodative central bank, and the fiscal support provided by disbursement of the Next Generation EU fund should allow Europe to grow at 4.3% next year.
Another bastion of growth in 2022 is likely to be India, as its economy continues to bounce back from a second coronavirus wave. Indian exports have been rising, while the agricultural sector recovers and service sector rebounds. We expect the Indian economy to grow by 7.4% next year.
Overall, we predict 2022 delivering another year of impressive growth, with the global economy growing by 4.5% – considering the relatively accommodative monetary policy stances that are still expected to be in place, the recovery in labour markets and strength of the global consumer. Further ahead into 2023 and beyond, we anticipate an orderly descent back to long-term trend averages as we exit the recovery phase and policy normalisation regulates activity.
Risks that may yet derail the recovery
Although we expect inflation to continue to overshoot central bank targets, we believe it will be less of a concern by the end of 2022.
Given the broad range of both demand-pull and cost-push inflationary pressures, it’s perhaps no surprise that year-on-year inflation has risen significantly since the second quarter of 2021. The relaxation of restrictions unleashed pent-up demand. Supply bottlenecks – in areas such as computer chips, container shipping and labour shortages – are also keeping inflation measures higher for longer than central bankers had hoped.
Price pressures are also coming from ultra-accommodative monetary policy and the flood of fiscal support. Technical and statistical factors, along with surging commodity prices, have added to short-term price pressures.
While several factors suggest that some of the inflationary pressures are transitory, there is evidence that implies price pressures may be more persistent than originally projected.
The level of spare capacity in many economies reduced as the economic recovery gathered pace. Labour and logistical obstacles have seen production struggling to keep pace with demand and inventory building. Lower participation rates in workforces have resulted in wage inflation becoming more ingrained than anticipated. Supply and demand imbalances suggest that commodity prices may remain elevated for some time.
Nonetheless, in the medium term, supply-chain disruption is expected to ease as restrictions are removed and capacity increases. Labour supply ought to pick up among the inactive older and younger populations as furlough programmes are closed, schools re-open and medical risks diminish. Price pressures should also moderate as global demand is likely to rebalance away from goods into services.
The rapid digitisation and ongoing investment in technology may also help to dampen long-term price pressures.
However, the upside risks to our inflation forecasts could be generated by a prolonged period of supply-chain disruption or labour market stress in a scenario where a shortage of supply allows workers to demand higher wages.
Will central banks bow to inflationary pressures?
How long central bankers can stretch the term “transitory” and stomach the spike in prices will be fundamental for policy rates and growth prospects in 2022. If price pressures trend back towards mandated levels in the second half of next year, as we expect, the impact on rates of the current elevated inflation data may be subtler than market pricing indicates.
While policymakers are clearly keen to normalise policy, we do not think that central bankers will embark on an overly aggressive or extended rate-hiking cycle. The first stage of normalisation will be to unwind the extraordinary measures implemented during the pandemic, such as the asset-purchase programmes.
The burning question for investors and central banks alike is how quickly all the fiscal and monetary policy remedies can be withdrawn and whether the patient – in this case the global economy – will stand again unaided.
It’s only after this that central bankers will turn their attention to interest rates. And while hikes may come earlier than previously projected, rates are likely to settle below neutral levels and remain some way beneath their historical averages.