Economic Outlook - July 2022

Executive summary

Headwinds to the global recovery from the pandemic are mounting, in the form of ongoing supply bottlenecks, geopolitical turmoil in Eastern Europe, and rampant inflation. Inflation was already rising in 2021 as consumer demand picked up, but has been exacerbated by Covid lockdowns in China and war in Ukraine. Global commodity prices are rising rapidly and central banks are struggling to maintain control over the situation amid growing concerns of another stagflation episode, one characterised by low growth and high inflation.

Key points

• Despite global GDP growth recovering to 5.9% in 2021, we expect it to decrease to 3.1% in 2022, as inflation squeezes consumer spending and supply-chain issues limit trade. By 2023 we expect growth to slow further to 3.0%

• We expect global CPI inflation to soar to 7.6% in 2022, dropping to 3.8% in 2023. Inflation initially started rising due to a surge in demand as Covid restrictions eased, while supply bottlenecks kept supply down. The war in Ukraine has since exacerbated inflation, as global commodities, notably fuel and wheat, experience shortages and further price hikes. Central banks are aggressively raising interest rates to combat inflation and to normalise monetary policy following the pandemic

• Although global trade was growing healthily at the start of 2022, Russia’s invasion of Ukraine and the subsequent sanctions thoroughly disrupted this growth. China’s severe zero-Covid policy and lockdowns have also stalled global trade. Overall, we expect that as Covid becomes increasingly endemic, supply-chain disruptions will ease, boosting global trade

• GDP growth in advanced economies is expected to slow to 2.7% in 2022 and 2.1% in 2023. Consumers are feeling the pressure of surging inflation, generally driven by high energy prices in Europe and supply-demand imbalances in the US. Continued global supply issues drag on export growth in advanced economies, along with general fiscal consolidation

• GDP growth in emerging market economies (EMEs) is forecast to be nearly halved in 2022 to 3.5%, down from 6.9% in 2021. EMEs are also feeling the pressure of supply-chain bottlenecks and inflation, but due to lower vaccination rates, are also at greater risk of new Covid outbreaks. We expect the Middle East and Emerging Asia to maintain the highest growth in 2022

• The continuation and escalation of the war in Ukraine is the key risk to our outlook, potentially leading to 1.7% lower GDP growth by the end of 2022. All regions would be impacted by shortages, higher commodity prices, and political instability, with Europe and especially Eastern Europe the most impacted