Overview

• Global inflation remains high and is showing no signs yet of easing. This is placing pressure on household finances which, in conjunction with central bank interest rate rises, is likely to slow growth.
• A focus of many advanced economy central banks has been to return rates to ‘neutral’. However, with persistent supply side issues –which monetary policy cannot address –continuing to put pressure on prices, and adding to the risk that inflation expectations may de-anchor, there is a real possibility that central banks move rates well above neutral (and above what we are currently projecting). This risk is highlighted by the Fed’s overnight increase in rates by 75bp and the Fed member projections for the fed funds rate which were well above what we had been expecting by the end of the year; we will review our expectations for the Fed (and the implications of Fed policy for growth) in coming days.
• The risk is that the speed and degree of policy tightening may prove too much for economies to handle, particularly given the commodity price shock currently in play. As a result, while not our current baseline forecast, recession risk for several of the major advanced economies, including the US, is uncomfortably high. Monetary policy acts with a lag so the risk is concentrated in 2023. Moreover, advanced economy growth is currently being supported by a normalisation of activity following the end of the COVID-19 wave earlier in the year and the high level of savings accumulated by households since the start of the pandemic. China is also starting to see a recovery in activity as restrictions in Shanghai and Beijing have been eased, although there are concerns at the time of writing that some restrictions may be re-imposed following another increase in COVID-19 case numbers, highlighting the uncertainty around China’s economic outlook, given the continuation of zero-COVID health policies.
• While we still see global growth of 3.4% in 2022, we have lowered our 2023 global forecast to 3.2% (from 3.4%). This reflects lower forecasts for the United States, Euro-zone and Japan in particular. 2024 growth is expected to be only 3.1%, below the long run average of 3.4%.

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