Fitch: Global Economic Outlook – December 2021

Concerns Over Inflation Are Mounting The scale and longevity of the global inflation shock has taken most forecasters and central banks by surprise and is bringing forward the start of global monetary policy normalisation. A strong recovery in global aggregate demand in nominal terms over the past year has not been matched by an equal recovery in output. Supply bottlenecks resulted in real GDP expanding by less than expected in 3Q21, with inflation being stronger than expected. GDP Forecasts Cut on Supply Issues & ChinaFitch Ratings has cut its 2021 growth forecasts for the US, Germany and Japan, reflecting recent supply-chain-related disruptions to industrial production.

We have lowered global GDP growth by 0.3pp since the September Global Economic Outlook, to 5.7%. This is still the fastest rate since 1973 though and far from stagflation. Fitch has also trimmed its world growth forecast for 2022 to 4.2% from 4.4%, but this primarily reflects a more intense slowdown in China. The policy response has been slower than anticipated and while we expect more easing announcements in the coming months, we now forecast China’s growth to fall below 5% in 2022. Pandemic Shortages Boost Goods PricesThe sharp rise in global consumer goods prices since March primarily reflects a huge surge in goods demand, fueled by stimulus measures, particularly in the US.

We expect goods prices to stabilise in 2022 as spending switches back to services, as strong investment boosts goods supply and as fiscal stimulus is unwound. Central Banks Wary of Inflation BroadeningBut the risk of inflation pressures broadening is making central banks nervous. Inflation has become a public concern – now amplified by energy price shocks – and inflation expectations have increased. US wage growth now exceeds pre-pandemic rates as the labour supply recovery lags. Stimulus is taking US GDP above pre-pandemic trends and the US output gap will turn positive in 2022.

We now expect the Fed to raise interest rates in September 2022 and the Bank of England (BOE) in December 2021, both far sooner than we expected. High inflation raises policy tensions. New Covid-19 variants could adversely affect supply and increase prices, implying risks if central banks delay normalisation. Divergence, Dollar Strength, EM ChallengesMonetary policy responses are becoming more divergent, with ECB interest rates still likely to be on hold through 2023 and the PBOC expected to cut interest rates in 2022. Further strengthening in the US dollar is expected over the forecast horizon. A stronger dollar and weaker Chinese growth could weigh on commodity prices in 2022, adding to emerging-market (EM) growth challenges from domestic monetary policy tightening.
Source: Fitch Ratings