NAB’s World on Two Pages – February 2022

Globally the Omicron variant of COVID-19 has spread rapidly; the sheer number of cases is disrupting economic activity as infected workers are forced to isolate. In Australia, we have revised up the expected rebound in Q4 GDP, but pulled down Q1 2022 as the spread of omicron weighs on the economy through both consumer caution as well as disruption to business.

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Global

The Omicron variant of COVID-19 has spread rapidly; while activity restrictions have been less onerous than in earlier waves, the sheer number of cases is disrupting economic activity as infected workers are forced to isolate. With inflationary pressures persisting, central bank policy rates are set to rise more rapidly than previously anticipated. Growth prospects for early 2022 appear relatively weak for both advanced economies and emerging markets, largely related to the current COVID-19 wave, with services being particularly impacted. Receding case numbers should allow for a bump in growth from Q2. COVID-19 remains the primary risk to the global outlook, including the potential for further waves, and it remains uncertain how long global supply chain bottlenecks will persist. Political tensions also pose a risk, most notably border tensions between Ukraine and Russia. Overall, our forecast for global growth in 2022 is softer – down to 4.2% (from 4.4% previously).

Australia

For Australia, we have revised up the expected rebound in Q4 GDP on the back of stronger than expected partials, but have pulled down Q1 2022 as the spread of omicron weighs on the economy through both consumer caution as well as disruption to business. That said, we continue to expect well above trend growth of 3.7% in GDP this year, before slowing to around trend in 2023. In the near-term, growth will be supported by a recovery in household spending, as well as both business and dwelling investment. Government spending will also likely continue to support growth this year. We expect the unemployment rate to decline further, from an already low 4.2%, which will eventually feed through to higher wage growth. Inflation is expected to remain high in the near-term as the impact of COVID on supply chains continues to play out, and firms continue to pass through the build-up in cost pressures. However, we expect this to begin to normalise later in the year. This will see inflationary pressure ease somewhat through 2023, but will be offset by faster wage growth – with inflation in underlying terms tracking around the top half of the target band by H2 2023. With a faster than expected recovery in the economy, we recently brought forward our rate call, with the RBA to begin normalising policy in late 2022. Overall, uncertainty remains elevated, with risks related to ongoing virus impacts, the pace of the recovery in migration, the true level of full employment, and how quickly supply chain issues resolve.

Find out more in NAB’s World on two pages (February 2022)