World Economy 1/2022

While the latest Omicron-related COVID-19 challenges may have some impact on growth, particularly in 1H22, the magnitude depends on the scale of further lockdown measures in key economies. The OPEC Secretariat’s economic growth forecasts have already anticipated some seasonal effect from COVID-19 with slowing activity in the northern hemisphere’s winter season and challenges stemming from supply chain bottlenecks. Keeping this in mind, the global GDP growth forecast for both 2021 and 2022 remains unchanged at 5.5% and 4.2%, respectively.

However, diverging growth trends continue among the various economies and regions. Strong momentum in the commodities sector, which supported growth particularly in 2H21, led to 2021 upward revisions in Latin America except for Brazil, OPEC and other developing economies. Also in 2H21, COVID-19-related constraints and corresponding supply chain issues led to some 2021 downward revisions in Japan and Asia-Pacific, while China and India remain unchanged but will need to be monitored in the coming weeks. In addition, the Euro-zone’s 2021 growth estimate was revised up after stronger-than-expected growth in 2Q21 and 3Q21, while the US growth forecast was revised down slightly for 2022 as the rapid rise of Omicron infections is expected to lower the 1Q22 forecast and the negotiations on additional fiscal stimulus have stalled in Congress. In the emerging markets, Brazil’s 2022 forecast was lowered as well, given very high inflation and corresponding high interest rates, political uncertainties and reduced fiscal support, as well as expected dampening effects from the Omicron variant in 1Q22.

In the OECD, the 2021 US GDP growth forecast remains at 5.5%, but growth was lowered slightly for 2022 to 4% from 4.1%, considering some impact from the current Omicron wave. Euro-zone economic growth in 2021 was revised up to 5.2% from 5.1%, taking into consideration stronger-than-previously reported 3Q21 growth, while growth for 2022 remains unchanged at 3.9%. Japan’s economic growth forecast for 2021 is revised down to 1.8% from 2%, after a stronger decline in 3Q21 than previously reported, while growth for 2022 remains unchanged at 2.2%. Growth forecasts in emerging economies remain largely unchanged, with China’s growth forecast for 2021 at 8% and 5.6% for 2022. India’s forecast for 2021 stands at 8.8%, and is forecast at 7% in 2022. Russia’s GDP growth forecast remains unchanged at 4% for 2021 and 2.7% for 2022. Brazil’s economic growth forecast for 2021 is unchanged at 4.7%, while growth for 2022 was revised down to 1.5% from 2% given the already-anticipated slowing momentum in 4Q21, which is expected to carry over into 2022.

The robust growth in the world economy continues to be challenged by uncertainties related to the spread of COVID-19 variants, the effectiveness of vaccines against the Omicron variant, and general uncertainties about the pace of vaccine rollouts worldwide. Moreover, supply chain bottlenecks will likely continue holding back some of the momentum. Finally, major central banks have stepped up their efforts to reign-in rising inflation. High sovereign debt levels in many regions, together with rising inflationary pressures and the consequent central bank responses, remain key factors to monitor.

Update on latest global developments

While the global Omicron wave has gained pace, the global economy seems to be well supported and has remained above average pre-pandemic growth levels in 2021 thanks to unprecedented fiscal and monetary stimulus. Omicron, in combination with ongoing supply chain bottlenecks, is forecast to dent the economic dynamic in the US and Euro-zone and to some extent China. But the effect so far has been minor and the largest impact may come from a further, albeit temporary, disruption in the already tight labour market, considering that infected people will be away from work for a short period of time while recovering.

Inflationary pressures have remained and are another important issue, primarily in the US and the Euro- zone given the importance to the US dollar and the Euro. Quantitative easing (QE) efforts in combination with the strong underlying global demand and supply chain bottlenecks have brought about new concerns on the impact of inflation as it is becoming persistent in major economies. To curtail the potential long-lasting impact of inflation, the major central banks have made announcements about adjusting their QE programmes and have all started considering the reduction of their very accommodative monetary policies, taking significant decisions particularly at the G4 central bank meetings in December. While the Fed announced a faster tapering of already ongoing reductions in QE measures and that key policy rates are likely to rise in 2022, the European Central Bank (ECB) said it would gradually start reducing its QE measures in March 2022 and does not plan to hike interest rates before 2023. The Bank of England (BoE) has been the most aggressive and announced a rate increase at its December meeting, moving out in front of the other major central banks. The BoE’s QE measures also ended in 2021. The Bank of Japan (BoJ), with the largest monetary stimulus and an extensive history of QE policies, has announced a reduction of pandemic-related QE measures, but will continue its general ultra-loose monetary policy and non-pandemic-related QE measures. Rising inflation led central banks in Brazil and Russia to further hike interest rates, likely impacting the progress of their recoveries in 2022. While India also experienced rising inflation in 2021, price rises have retracted to more reasonable levels in recent months, in line with the central bank’s expectations, allowing it not to hike interest rates.

Global trade has been impacted by supply chain disruptions, but has continued to support the global economic recovery amid strong demand. In a positive sign, trade has picked up again. In October, world trade volumes increased by 6.1% y-o-y, compared with 4.7% y-o-y growth in September, based on the CPB World Trade Monitor Index provided by the CPB Netherlands Bureau for Economic Policy Analysis. Supported by the increase of world commodity prices, trade in value terms rose by a much higher level on a yearly basis, increasing by 15.4% y-o-y from 15.3% y-o-y in September.

Near-term global expectations

COVID-19-related challenges continue and constitute the key element for near-term economic growth. Some slowing momentum in the Northern Hemisphere winter period has already been anticipated in the OPEC Secretariat’s economic growth forecast, while the rapid spread of Omicron has led to some additional minor 1Q22 adjustments especially in the US, but also in some other economies. For the time being, some additional recovery is forecast to materialize in 2Q22 after a softening in 1Q22. General COVID-19-related uncertainties will likely need to be considered for the whole year of 2022, as will progress in the fight to end the pandemic. Not only has the global vaccination rollout gained pace and has already prevented the more severe impact from new variants, it is furthermore expected that newly updated vaccines will be more effective in reducing the impact of Omicron and possibly new variants. In addition, new medicines for treating COVID-19 will likely be approved soon that will also lessen the impact of COVID-19. Finally, the world has quickly adapted and the impact of the challenges stemming from COVID-19 are far less disruptive than they were before. It is anticipated that following relatively lower growth in 1Q22, the dynamic will gain pace towards the end of 2Q22.

However, as long as COVID-19 in combination with the challenges of supply-chain bottlenecks and inflation will impact the global economic momentum, a volatile growth pattern will remain. While some economic production and logistic indicators currently imply a gradual improvement in the supply chain, inflation is likely to be of a more sustained nature. In the first wave, inflation was primarily driven by temporary factors spurred by pent-up demand and temporary supply chain bottlenecks. That has primarily pushed up prices in the leisure and hospitality sector as well as transportation. A more sustained effect has now started to kick in through a rise in wages and salaries in combination with an increase in rents or rent-equivalent prices, especially in the developed economies. These effects are forecast to have a more sustained impact in the coming months and it remains to be seen if inflation will retract as much as is currently assumed by market participants. Furthermore, the efforts related to the energy transition are important to consider as they seem to have gained pace recently and will likely have an inflationary effect through tax increases, especially on fossil fuels. With these developments taken together, inflation is expected to remain and likely to be above consensus levels on a global basis. These pressures may further lead central banks, especially the US Fed and the ECB, to envisage a more aggressive tightening and key interest rate cycle than is currently foreseen.

Global purchasing managers’ indices (PMIs) for both the manufacturing and services sectors were relatively stable in December. The global manufacturing PMI stood at 54.2, basically unchanged from the previous month. The global services sector PMI stood at 54.6, one index point lower than in November, when a level of 55.6 was recorded. This indicates some slowdown in the services sector due to a tightening labour market and a likely slowdown stemming from additional social distancing measures across the globe that were stepped up in December due to Omicron.

With some counterbalancing adjustments, especially a downward revision in Japan and an upward revision in the Euro-zone, the 2021 GDP growth forecast remains at 5.5%. Growth levels in 2022 are forecast to normalize at lower levels and to remain relatively divergent. GDP growth in 2022 is forecast at 4.2%, unchanged from the previous month. This implies that, among other issues, COVID-19-related challenges will not derail the recovery. Moreover, it is assumed that inflation will retract somewhat and will not continue at the high levels seen in 2H21, particularly in the US and the Euro-zone.