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A price worth paying?
Global Economics Quarterly.
Recession in many places now looks unavoidable, so the challenges facing global central banks have become even harder. The days of responding to the first signs of stagnation or contraction with monetary easing are consigned to the history books of a rapidly globalising pre-pandemic world.
Policymakers in independent central banks are dusting off the playbook of the 1970s and early 1980s. Having claimed success for a sustained period of low and stable inflation for two decades, they now face very high inflation. It may not all be of their making, but their ultra-loose monetary policies undoubtedly played a key role in sparking it.
Policymakers in independent central banks are dusting off the playbook of the 1970s and early 1980s.
While debate rages about the extent to which inflation is driven primarily by supply, demand or structural factors, central banks’ ability to lower the pace of price rises quickly back towards target is critical for maintaining inflation credibility and, in turn, medium-term macroeconomic and social stability. Lower near-term output and higher unemployment might be a price worth paying to do so.
Turning to our global growth forecasts, we downgrade our 2023 forecast to 1.8% from 2.6%, with lower expectations for many markets. We also make a small revision down for 2022, mostly because of slower growth in the US and China. For the first time, we include our forecasts for 2024. Clearly there is much we still do not know about the course of the war in Ukraine, Europe’s attempts to wean itself off Russian gas, the evolution of China’s COVID-19 strategy or US politics. For most economies we anticipate some modest recovery to a growth rate that is below the pre-pandemic potential.
1.8%
2023 global growth forecast (from 2.6%)
The marked slowdown in 2023 and weak recovery in 2024 are not matched by a rapid decline in inflation. We expect it to slow but remain above pre-pandemic rates: the growth-inflation trade-off is deteriorating. We are confident major central banks will do enough to prevent an immediate wage-price spiral. We are less sure they will do enough to get underlying inflation back to target in the next two to three years. If so, credibility risks could persist.
First published 25th September 2022.
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