In focus

Economic and Strategy Viewpoint - December 2021

After a surge in activity in the first half of the year the world economy hit an air pocket in the third quarter. Bottlenecks in supply chains meant that delivery times soared and firms had to cut production due to a lack of parts. As a result global growth stalled while inflation rose sharply.

Our near term view is that the third quarter slowdown in growth is temporary and the world economy will re-accelerate in the current quarter, led by the US. An easing of supply chain problems is supporting global industry where orders remain buoyant.

Looking further out into 2022, we see growth cooling as the massive policy stimulus in response to the pandemic fades. There will be support from consumer and corporate spending, but overall demand is set to ebb. Inflation should then moderate, but we will probably have to wait until the second half of next year to confirm that the rise has been transitory.

Both the eurozone and UK have had their growth forecasts downgraded for 2022 as the spike in energy inflation is set to reduce the purchasing power of households. Despite this, growth remains strong as households are still expected to boost consumption and lower their savings rates.

However, differing labour market conditions will drive the UK and eurozone to diverge on policy. The Bank of England is forecast to raise rates imminently, while fiscal policy is also being tightened. In contrast, the European Cental Bank is likely to keep quantitative easing going, albeit with less purchases, but with fiscal policy still very stimulative for a number of years yet.

The roll-out of vaccines should ensure less disruption from Covid in emerging markets, but economic growth is set to slow as higher inflation and interest rates weigh on activity. China is ahead of most emerging markets in already experiencing a sharp slowdown. We expect looser policy to stabilise growth by mid-year, setting the scene for some recovery, but we are wary of downside risks stemming from the real estate sector.

The emergence of the Omicron variant occurred after we finalised our forecasts, but clearly increases the risk of new restrictions on activity and renewed supply side disruption. At this stage it is too uncertain to judge the macro impact, only that it adds to the stagflationary risks in the world economy.

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Economic and Strategy Viewpoint - December 2021 21 pages | 610 kb