Central banks and governments rein in stimulus

COVID-19 related restrictions and disruptions are slowing growth and raising inflation

11 October 2021 Janet Henry, Global Chief Economist

Global inflation is rising. Global growth is slowing. COVID-19 is far from over. But now that economies and employment have rebounded more quickly than feared, many central banks are preparing to reduce asset-purchases or raise interest rates while governments are also cutting fiscal support.

We have thus trimmed our global growth forecasts and lifted our inflation projections modestly.

In parts of Asia, pandemic-related lockdowns have closed factories, disrupting global supply chains, and in mainland China, activity is constrained by regulatory tightening, especially in the property sector, which could hit commodity producers in emerging countries.

Meanwhile in well-vaccinated advanced economies, travel restrictions are being eased but consumer confidence is faltering amid supply bottlenecks, rising prices and squeezed disposable incomes. In Europe, surging gas prices also threaten inflation, and while some elements like used car prices should be temporary, the longer inflation stays high, the greater the risk that wages follow.

There are other reasons why higher inflation could be a bigger danger over the medium term than it has been for a long time. Price stability is no longer the central bankers’ only goal: worrying about growth, employment, financial stability and even climate change raises the risk of policy conflicts. Reverses in globalisation also pose upside risks.

A repeat of the double-digit inflation of 1960s and 1970s is unlikely though – labour markets are more flexible and less unionised, automation and robotics are deflationary, and the internet improves price transparency – but an eventual return to a structurally low-inflation is not a given.

Some high-inflation emerging economies are already raising interest rates rather than face currency depreciation. In G10, Norway has raised its policy rate and we expect more central banks to slow or halt asset-purchase programmes this year with a Bank of England rate rise forecast for February 2021.

Very few advanced-world governments – but notably the UK’s – have announced plans to raise taxes to finance structurally higher spending but the huge pandemic-related fiscal impulses are rapidly unwinding and any additional fiscal support is likely to be highly targeted.

Eurozone fiscal support is bolstered by the EUR750 billion Next Generation EU fund but even if the US Families Plan and Jobs Plan go ahead, the additional stimulus in 2022-23 will be much less than was delivered in 2020-21 and spread over a much longer period.

The reduction in our global GDP growth forecast for 2021 from 5.9 per cent to 5.7 per cent reflects lower expectations for the US and much of Asia-Pacific, with mainland China reduced to 8.3 per cent. However, we have raised our eurozone prediction to 5.2 per cent with uplifts for Brazil, Russia and Poland too.

Asia is the one region where we have not lifted our inflation projections: its consumer recovery is relatively lacklustre and its growth more export and investment driven.

The scale of the policy support means some advanced economies’ GDP is projected to be higher by the end of 2022 than we expected before COVID-19. However, that does not rule out economic scarring from the pandemic: we forecast world growth to slow from 4.1 per cent in 2022 to 3.0 per cent in 2023.

The US growth predictions are 3.8 per cent in 2022 followed by 2.4 per cent, while we expect mainland China to see 5.6 per cent, then 5.8 per cent. For the eurozone, we see 4.0 per cent, then 1.9 per cent in 2023.

First published 29th September 2021.

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