Just when there were glimmers of hope that the worst of the supply chain disruptions were easing and that we might be moving into the final phase of the global pandemic, the world’s economy faces another potentially enormous broad-based supply shock. The implications of the Russia-Ukraine conflict and the steady roll-out of sanctions by the West appear set to extend well beyond the short-term repercussions for commodity prices and inflation.
Global growth will clearly be weaker and inflation higher, potentially significantly so. We lower our global GDP growth forecast for 2022 to 3.5% from 4.1% and for 2023 to 2.9% from 3.2%. We see global inflation averaging 6.5% this year, up substantially from 4.6% previously; for 2023 we raise our inflation forecast to 4.2% from 3.3%.
The swings in commodity prices and financial markets have been dramatic and volatility appears set to be a feature of the outlook for the foreseeable future. The overall impact amounts to a redistribution of income from commodity consumers to commodity producers. Europe is a clear relative loser via higher energy prices and possible disruption to supplies. For many emerging economies stronger headwinds will come from the surge in the price of agricultural commodities, particularly wheat. Manufacturing-based economies are not only confronted by higher energy and metals prices but also face possible disruption to gas supplies.
While governments may step in to cap household energy bills, already-high inflation is set to go higher still around the world. The squeeze on real incomes will intensify, hitting consumer spending. Many of the other commodity price rises will be felt initially through higher input costs for the corporate sector, particularly in manufacturing-based economies and more so in those advanced economies where labour costs are also rising. Companies may be forced to persistently squeeze profit margins, halt production, shed labour or continue – if able – to raise prices.
The new global supply shock makes monetary policy decisions even harder. The major central banks know that big rises in energy prices squeeze real incomes and can result in a sharp slowdown – or even an outright contraction – in consumer demand, resulting in interest rate cuts. But with US inflation nudging 8% in February, the US Federal Reserve’s clear priority is to stabilise inflation – it has begun to raise interest rates and appears set to remain on that course as long as inflation stays high.
We are less convinced that the European Central Bank will have to tighten that aggressively, given the growth implications from the Russia-Ukraine crisis are more severe. In Asia, weaker consumer demand has kept a lid on inflation and central banks have been inactive, except China’s which we expect to continue easing. For much of the rest of the region, we expect a slower pace of tightening than the US Federal Reserve.
First published 22nd March 2022.
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