Global growth is set to remain strong, albeit uneven, pointing toward a rising divergence between advanced and emerging economies. Growth was mainly fueled by consumption, rising investments, and rebounding global trade. As such, global output is expected to increase by +4.1 percent in 2022, with the Eurozone and the U.S. growing in line with the global economy at +4.1 and +3.9 percent, respectively. China's growth of +5.2 percent in 2022 will constitute the lowest contribution to the global GDP growth since 2015, most likely causing negative spillover effects on emerging markets. Vaccination rates, supply bottlenecks, and policy choices will be the factors potentially impeding growth.
As supply chains remain disrupted, energy prices high, and labor market tight, the topic on everyone's minds-inflation-will most likely stay high until mid-2022. However, inflation is likely to decelerate this year as the recovery becomes entrenched. Overall, the average annual inflation this year is expected to remain high at 4.4 percent in the U.S. and close to 3 percent in the Eurozone. Amid continued uncertainty about the scale and duration of inflationary pressures, central banks are shifting towards a more hawkish monetary stance to prevent inflation from becoming embedded in expectations.
Amplified by the omicron variant and disrupted by labor and supply chain bottlenecks, global trade will nonetheless continue expanding again above the long-term average and is expected to grow by +5.4 percent in 2022 and +4.0 percent in 2023. At a sector level, the 2021 outperformers should continue to see strong exports in 2022 (energy, electronics, machinery and equipment). The main export winner in 2023 should be the automotive industry.
To ensure sustainable growth, a gradual withdrawal of monetary and fiscal policy support will be necessary. Regarding fiscal policy, fiscal consolidation in the U.S. will be stronger when compared to Europe. As already mentioned, monetary policy might be more hawkish due to current inflationary pressures in advanced economies. Greater divergence of fiscal and monetary policy normalization across countries could further increase imbalances and disrupt the recovery of international trade. As the gap between monetary and fiscal policy stances in Europe and the U.S. is bound to widen, there is a rising risk of decoupling, which could feed into capital market dislocations.
Tighter financial conditions or a premature withdrawal of policy support could additionally undermine the recovery and increase private and public sector vulnerabilities. Conversely, if inflationary pressures persist, central banks could fall behind the curve, with overshooting inflation causing potential adverse wage-price feedback effects that could hamper growth.
Potential complications related to the omicron and other virus variants could further slow down the recovery and create additional global imbalances. As long as the vaccination rates remain below the threshold needed to secure herd immunity, potential new lockdowns could keep recovery uneven and incomplete.
Political risks are also on the radar this year and with it, the risk of Covid-19 crisis (mis)handling, which is likely to take center stage in national polls. Key votes will be taking place in Portugal, Sweden, France and Hungary. The two largest global economies, China and the U.S. (midterm elections) will also be heading to the polls, as will Australia, Brazil, and India.
In emerging markets, voters in the Philippines, Columbia, and Brazil will cast their votes. On the geo-political front, the U.S.-China relationship is likely to remain strained.
In addition to increasing the vaccination rates, the key policy priority should be aimed at calibrating the right level of support to the pace of the recovery, while gradually shifting toward more targeted measures focusing on growing firms and sectors.
For an in-depth look at the numbers and regional outlooks, click here for the Economic Outlook 2022: Don't Look Up! report by Allianz Research.