With a spike in inflation, the global economy can achieve a soft landing
After a brief decline in the second quarter of 2022, the global economy is expanding again.
Two shocks derailed the economy in the second quarter: Russia’s February 24 invasion of Ukraine and the COVID-19-related lockdowns in mainland China. After growing at annual rates of 6.2% quarter-on-quarter (q/q) in the fourth quarter of 2021 and 2.6% in the first quarter of 2022, global real GDP fell at a rate of 1.8% in second trimester. Recent data suggests that the global economy is back on track, driven by resilient emerging markets.
At the end of 2022 and 2023, the most likely scenario is that of sluggish global growth.
High inflation continues to squeeze household budgets and undermine consumer confidence. Meanwhile, the post-pandemic resurgence of tourism and consumer services is beginning to fade. The lagged effects of tighter monetary policy and rising interest rates will be felt throughout the year ahead, limiting investment and spending on durable consumer goods. Global real GDP growth is therefore expected to slow from 5.8% in 2021 to 2.7% in 2022 and 2.3% in 2023. Once inflation subsides and financial conditions improve, global growth is expected to resume to 3.0% in 2024.
A moderation in price and wage inflation is key to predicting a soft landing.
In the current economic situation, a global “soft landing” could be characterized by a slowdown in demand, the resolution of supply chain disruptions, a decrease in inflation of input and output prices, markets balanced labor and well-functioning financial markets. On the inflation front, the recent declines in industrial and agricultural commodity prices are helpful. By mid-August, the IHS Markit Materials Price Index had fallen 20% from its peak in early March. Crude oil prices fell below USD 100/barrel largely due to weak demand from mainland China. Lower commodity prices are filtering through to intermediate and finished products downstream and should bring some relief to consumers in most parts of the world. After rising from 3.9% in 2021 to 7.6% in 2022, global consumer price inflation is expected to slow to 4.5% in 2023 and 2.6% in 2024. Further shocks from However, supply could cloud the near-term outlook as inventories are low in the energy and metals markets.
In turn, the tightening of monetary policy will play a key role in controlling inflation.
An open question is whether central banks can achieve a soft landing and achieve their inflation targets without pushing interest rates above prevailing inflation rates. Supply conditions related to the COVID-19 pandemic and the energy transition have been behind much of the surge in inflation over the past two years. We believe that tighter financial conditions are necessary to calm excess demand and help lower inflation. The degree of tightening will depend on local conditions. In the United States, the federal funds rate is expected to reach a range of 3.50-3.75% in December 2022 and remain there for a full year. As the Eurozone tumbles into recession later in 2022, the European Central Bank acts more cautiously, raising its refinancing rate to its long-term neutral rate of 2.00% in January 2023. Investors’ flight to security poses risks for emerging markets that rely on inflow capital to fund trade and fiscal deficits.
Energy supply problems and high inflation will push Western Europe into recession.
The UK slipped into recession in the second quarter as high inflation eroded household incomes and consumer confidence plunged to a record high. With consumer price inflation at 10.1% year-on-year (y/y) in July and rising (with a 75% increase in gas and electricity price caps in October), the recession in the UK is expected to persist until spring 2023.
Eurozone real GDP growth came in better than expected (0.7% q/q) in the second quarter on the back of inventory accumulation and pent-up demand for services. However, growth prospects are rapidly deteriorating due to continued energy supply shortages, accelerating prices, the ongoing Russian-Ukrainian war and tighter financial conditions. With the Eurozone likely to experience a mild recession in late 2022 and early 2023, real GDP growth is expected to slow from 5.2% in 2021 to 2.9% in 2022 and 0.8% in 2023. Northern manufacturing centers of Europe, including Germany, are the most affected. exposed to cuts in the Russian energy supply.
The American economy is a paradox of stagnation of real GDP and booming employment.
Although real GDP fell slightly in the first two quarters of 2022, let’s not call it a recession! Since December 2021, monthly indicators used by the National Bureau of Economic Research in dating business cycles have shown strong gains, including employment, industrial production, real personal income excluding transfer payments and real retail sales. Meanwhile, a marked slowdown in inventory accumulation drove down real GDP. Our forecast calls for a period of sluggish economic growth through the end of 2023, as moderate gains in consumer spending and government purchases are offset by significant declines in residential and commercial construction. Real GDP growth is expected to slow from 5.7% in 2021 to 1.5% in 2022 and 1.0% in 2023 before picking up to 1.7% in 2024. With growth below potential, the growth rate US unemployment will likely rise from 3.5% in July to 4.8% in mid-2024.
The economy of continental China continues to struggle.
After falling 2.6% q/q in the second quarter, real GDP is expected to pick up in the third quarter, although July data points to below-average growth in services and manufacturing. The government’s aggressive zero COVID policy will remain in place until at least March 2023, preventing a return to normalcy and limiting the effectiveness of new government stimulus programs. The housing market remains in a deep recession and falling land sales are hurting local government finances. Real GDP growth is expected to slow from 8.1% in 2021 to 3.8% in 2022 before picking up to 4.9% in 2023.
Emerging Asia-Pacific markets will support global growth as other regions falter.
After slowing from 6.2% in 2021 to 3.8% in 2022, Asia-Pacific real GDP growth is expected to pick up to 4.2% in 2022 and 4.5% in 2023. India, Indonesia, Vietnam, the Philippines, Bangladesh and Cambodia are likely to achieve growth rates of 5-7%. This performance reflects strong intra-regional growth dynamics linked to regional free trade agreements, efficient supply chains, competitive costs and regular inflows of foreign direct investment.
At the end of the line
With global demand cooling and supply disruptions easing, global inflation is expected to moderate in 2023 and 2024. The global economy is expected to make a soft landing, with real GDP at 2.5% on average in 2022 and 2023. It will be a multi-speed economy. , however, Western Europe is expected to experience a mild recession in late 2022 and early 2023. Other major countries will avoid recessions but perform below their potential.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a division managed separately from S&P Global.