With inflation at its peak, central banks around the world are raising interest rates with new urgency, hoping to rein in inflation by slowing aggregate demand growth and achieving a closer balance with global demand. ‘offer. Meanwhile, Russia’s war with Ukraine and recent shutdowns in mainland China have further disrupted supply chains, adding to cost pressure. With high inflation shaking consumer and investor confidence, the odds in the forecast are moving closer to recession. In Europe and North America, the prospects for a “soft landing” are fading.
Financial market turbulence is another sign of the changing economic climate.
Global equity markets moved into bearish territory in mid-June, with the MSCI World Index and the S&P 500 Index each down 23% year-to-date. In June, long-term bond yields rose sharply in anticipation of future increases in central bank policy rates. Capital markets remain open, but financing costs are rising for businesses, consumers, homebuyers and governments. The coming year will bring a tougher environment for builders and capital goods producers. Investors’ flight to safety would likely mean continued US dollar strength and heightened risks for emerging markets that rely on capital inflows to fund trade and fiscal deficits.
Will central banks succeed in cooling inflation?
With persistence, monetary policy can be effective in anchoring inflation expectations and preventing an upward spiral in prices and wages from taking root. In the absence of new supply shocks, the outlook is optimistic. Our June forecast calls for global consumer price inflation to decline from 7.0% in 2022 to 4.0% in 2023 and 2.7% in 2024. This price deceleration reflects a gradual resolution of supply chain and a slowdown in demand. Industrial and agricultural commodity prices are expected to retreat from recent highs over the next two years, although most prices will remain well above pre-pandemic 2019 levels. As consumer demand shifts from goods to services, a moderation in goods price inflation will be partially offset by an acceleration in services price inflation.
Energy prices will play a central role in the inflation outlook, given the key role of energy as an inputgoods and services sectors of the economy.
Lean inventories, limited spare capacity and shifts in supply dependencies following Russia’s invasion of Ukraine will add to price volatility, especially during seasonal peaks in demand. Our next forecast will incorporate the EU’s ban on around 80% of its Russian oil imports, as well as continued sanctions against Iranian oil. As a result, the average Brent crude oil price will be above the current forecast assumption of USD 113/barrel in the second half of 2022 and USD 100/barrel in 2023.
Our June forecast calls for global real GDP growth to slow from 5.8% in 2021 to 2.9% in 2022 and 2023,slightly below potential.
The easing of pandemic-related restrictions and the revival of service sectors (including travel and tourism, leisure and the arts) are key support for growth. However, the fallout from the tightening of financial conditions should lead to a downward revision of the outlook for global growth in the next forecast. The expected soft landing in early June will likely give way to a bumpier ride.
The United States is facing a growth recession and rising unemployment.
The US Federal Reserve raised its benchmark rate by 75 basis points at its mid-June meeting and signaled its determination to bring inflation down to 2%, acknowledging that it expects unemployment to rise. Forecasts from participants in the Federal Open Market Committee suggest that the federal funds rate will rise another 175 basis points in 2022 and 25 basis points in 2023, resulting in a target range of 3.50 to 3.75 %. This is 50 basis points higher than forecast in our early June forecast. Since the release of the forecast, new data on retail sales, housing starts and inventories have led to a downward revision to our tracking estimate of second-quarter annualized real GDP growth from 2.4% to 0.8%. Although household finances are generally sound, high inflation is eroding real incomes and making households more cautious about spending. The boom in housing markets is fading and companies are expected to scale back their capital spending plans for the year ahead. Real GDP growth is expected to slow from 5.7% in 2021 to 2.5% in 2022 and 1.8% in 2023 and 2024, with weighted downside risks. With real GDP growth below potential, the unemployment rate will rise from 3.6% in May to a peak of nearly 5.0% by 2025.
Higher energy costs could push Western Europe into recession.
Our June forecast already factors in slight contractions in second quarter real GDP in the UK, Italy, Spain and the Netherlands. With inflation surprisingly on the rise, central banks are accelerating the pace of tightening, with the European Central Bank now expected to start raising interest rates in July. The fallout from the Russian-Ukrainian war has deflated consumer and business confidence. Eurozone real GDP growth is expected to slow from 5.4% in 2021 to 2.5% in 2022 and 1.5% in 2023. The prospect of further energy supply disruptions driving up prices remains a downside risk.
Mainland China’s economy is beginning to recover from COVID-19-related lockdowns.
Mainland China’s economic slowdown eased in May as industrial production and exports increased while services and retail sales remained in contraction. The government’s aggressive zero COVID policy will remain in place until 2022, preventing a return to normal and limiting the effectiveness of economic stimulus measures. The real estate market remains in recession and the fall in land sales is weighing on the finances of local authorities. Real GDP growth is expected to slow from 8.1% in 2021 to 4.2% in 2022 before picking up to 5.2% in 2023.
The Russian-Ukrainian conflict becomes a war of attrition.
The Russian invasion of Ukraine on February 24 transformed the geopolitical landscape. Our predictions predict that Russia will continue to wage a war of attrition in the Donbass, progressing slowly. The outcome of a high-intensity but indecisive war in the Donbass could be a frozen conflict, with some Ukrainian territories remaining de facto under Russian occupation. Through sanctions, trade policies and private investment decisions, Russia’s international trade will be restricted and its economy will undergo restructuring to increase self-sufficiency. Russia’s real GDP is expected to fall 10.6% in 2022 and 1.1% in 2023 before beginning a slow recovery. After a 44% collapse in 2022, Ukraine’s real GDP is expected to rebound 28% in 2023 and 16% in 2024 as reconstruction continues with the support of substantial aid from Western allies.
At the end of the line
Persistently high inflation is prompting central banks to tighten policies more aggressively to calm demand amid supply disruptions. While the global economic expansion is expected to continue at a slower pace, the risks of recession are increasing.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.