Worse than expected. Results of 2021, forecasts for 2022
The main forecasts for 2021 as a whole were not very optimistic, but the year turned out to be even more difficult than it was supposed at the beginning. Increasing incidence, disruption of the economic recovery process, rising inflation.
The unfavorable development means that the global economy enters 2022 in a worse position than expected.
Reports of the «omicron» strain led to increased mobility restrictions and volatility in financial markets in late 2021.
Supply disruptions continued to have a negative impact on economic activity. At the same time, inflation was higher and broader than expected, especially in the US.
In addition to these pressures, the downturn in China's real estate sector is proving to be more protracted and the recovery in private consumption - weaker than previously thought.
Still in the grip of a pandemic
Since the beginning of October, the number of deaths from COVID-19 in the world has averaged about 7,000 people a day, down from about 10,000 at the end of August.
Vaccine distribution, while still uneven, has played a major role, with more than 55 percent of people receiving at least one dose. However, the emergence of the «omicron» strain at the end of November threatens to weaken this half-hearted move towards economic recovery.
The baseline forecast is to reduce the number of adverse health outcomes (severe illness, hospitalization and death) to low levels in most countries by the end of 2022. This implies that vaccination levels will be achieved in most countries by the end of 2022.
Unexpected deterioration of the situation in the second half of 2021
Supply disruptions persisted in the fourth quarter, hurting manufacturing all over the world, particularly in Europe and the US.
In China, the disruption of economic activity due to the COVID outbreaks, shutdowns in industrial production due to power outages, lower real estate investment, and faster-than-expected declines in public investment all they contributed to the slowdown in economic activity in the second half of the year.
Although there were signs of a reversal in global trends in November, with rising global trade and better-than-expected performance in services and manufacturing, this only partly offset the earlier deterioration.
Throughout the second half of 2021, inflation continued to rise under the influence of several factors that had different significance depending on the region.
Fossil fuel prices have almost doubled over the past year, increasing energy spending and raising inflation — especially in Europe.
Rising food prices, for example in sub-Saharan Africa, have also contributed to rising inflation. At the same time, persistent supply chain disruptions, overcrowded ports, obstacles to land transport and high demand for goods have also led to increased pressure on prices, particularly in the United States. Higher import prices, for example in Latin America and the Caribbean, also affect inflation.
Forecast 2022 — Global Economic Slowdown
Global economic growth in 2021 is estimated at 5.9 percent, and in 2022 it is expected to decrease to 4.4 percent.
The baseline scenario includes the expected impact of travel restrictions, border closures, and the impact of the spread of the «omicron» strain on public health.
The degree of influence of these factors differs between countries and depends on the vulnerability of the population, the severity of restrictions on movement, the expected impact of contagions on labor supply, and the importance of high-contact sectors.
Inflation is expected to remain elevated in the short term and will average 3.9 per cent in advanced economies in 2022 and 5.9 per cent in emerging and developing countries. Inflation should gradually decline from its higher levels as supply chain disruptions diminish, monetary policy tightens and the balance of demand shifts from commodity-intensive consumption to services.
The rapid rise in fuel prices is also expected to ease in 2022-2023, helping to contain overall inflation. Futures markets indicate that oil prices will rise by about 12 per cent in 2022 and natural gas prices by about 58 per cent (both significantly below 2021)and then return to lower levels in 2023 as supply-demand imbalances continue to narrow.
Food prices are expected to follow a similar pattern, rising at a more modest rate of around 4½ percent in 2022 and falling in 2023.
In many countries, nominal wage growth remains subdued despite the return of employment and participation rates to near pre-pandemic levels. However, in the US the situation is different: a sharp decline in unemployment was accompanied by a strong rise in nominal wages.
This indicates a tightening of the situation on the labor market in the United States, which is not noted in other countries. If the US labor force participation rate remains below pre-pandemic levels, and disincentive workers will remain out of the market, tighter conditions in labor markets could push prices up.
Risks to the economic outlook
The balance of risks is still skewed to the downside, and the outlook for the global economy depend critically on five key questions:
- What is the most likely dynamics of the pandemic?
- How will a less accommodative US monetary policy affect global financial conditions?
- When will disruptions in supply chains ease?
- Will the rigidity of the situation on the labor market lead to higher wages and a steady rise in inflation?
- Will the recession in China's real estate sector intensify?
Other factors
Geopolitical tensions in Eastern Europe and East Asia threaten energy supplies, international trade and policy cooperation.
Social unrest, which eased during the initial period of the pandemic, is rising again in some countries, partly due to higher food and energy prices.
In addition, many of the higher tariffs introduced in 2018-2019 continue to apply, and tangible tensions between countries in the technology sector remain.
All these circumstances threaten the formation of additional obstacles on the way to economic recovery.