The Forward View – Global: July 2022

Tightening monetary policy puts the brakes on growth prospects

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Overview

  • Major central banks continue to tighten monetary policy in response to inflation rates that are running at decade highs, thereby straining household finances (which have also suffered from wealth effects due to asset repricing in equity and other financial markets).
  • There is a risk that the supply side constraints that have contributed to inflationary pressures could persist for some time. The duration and severity of the Russia-Ukraine conflict remains uncertain – negatively impacting energy and agricultural markets – with the latter having the potential for prolonged impacts in low-income economies. Similarly, China is persisting with its public health response to COVID-19 – as highlighted by the recent lockdown in Xi’an – which presents ongoing risks to supply chains.
  • As a result, global growth will be under considerable pressure over the next year, with the risk of recession in one or more advanced economies elevated. Our forecasts are consistent with mild recessions in the US, UK and the Euro-zone. Euro-zone recession risks are tied to Russian natural gas supply ahead of their winter; indeed, a major cutback of supply would raise the prospect of a severe recession (with spill overs to global energy markets and economic activity).
  • COVID-19 continues to present substantial uncertainty to the global outlook. According to recent reports, the BA.5 subvariant of the Omicron variant (responsible for the lockdown in Xi’an) is more transmissible and faster spreading than earlier subvariants, increasing the risk of COVID-19 related disruptions, ranging from quarantine-related labour shortages through to large scale lockdowns in different regions (the latter primarily a concern in China).
  • Overall, we see the global economy expanding by 3.2% in 2022 (previously 3.4%) and 2.9% in 2023 (was 3.2%). In 2024, we see a modest pickup, back up to 3.0%, however global growth is set to remain below the long run average of 3.4%.

For further details, please see The Forward View – Global (July 2022)