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Economy in Brief

Global Growth Outlook Checked by Higher Inflation
by Andrew Cates  November 17, 2021

Economic forecasters are increasingly concerned about the outlook for inflation. That’s one of the overriding messages from the November Blue Chip survey of economic forecasters. Compared with 3 months ago, GDP forecasts for 2022 for most major economies have been revised down. At the same time as this, CPI inflation forecasts have mostly been revised up (see figure 1 below).

A noteworthy exception to this rule of thumb was China, where both the growth and inflation outlook for next year have been revised sharply lower. Positive GDP revisions in the meantime earmarked the outlook for India.

Figure 1: Weaker global growth expectations, higher inflation expectations

Source: Wolters Kluwer, Haver Analytics

That this heightened global pessimism about growth can be traced to higher inflation can be seen more clearly in figure 2 below. Those economies that have seen relatively large negative GDP revisions have – on the whole – seen relatively large positive inflation surprises in recent months. The US, UK and Brazil are good examples. In contrast, those economies that have seen relatively small negative GDP revisions have - on the whole - seen relatively minor upward revisions to inflation forecasts.

Figure 2: Heightened growth pessimism can be traced to heightened inflation pessimism

Source: Wolters Kluwer, Haver Analytics

These global inflation concerns can, in turn, be traced to a number of well-known factors at present including supply side congestion and accommodative monetary and fiscal policies. But there are some grounds, however, for thinking that some of these inflation drivers could lose their potency in the period ahead.

Monetary policy, for example, is becoming less accommodative as many Central Banks are either already scaling back asset purchases or have pre-announced that they will do so very shortly. Many are additionally raising interest rates or are about to do so. Credit impulses have also turned negative in most major economies in recent months, a trend that was notably extended in Q3 2021 in both China and the US (see figure above). Tighter monetary conditions may exacerbate that trend in the period ahead as well.

Figure 3: Credit impulses are negative in the US, China and the Euro Area

In the meantime, fiscal policy – at the global level – is becoming much more restrictive. Forecasts from the IMF, for instance, suggest that having eased policy to the tune of around 4.5% of their combined GDP in 2020, the fiscal stance in the major G20 economies will steadily become more and more restrictive in the coming years (see figure 4 below). That could additionally be quite significant given the outsized role fiscal policies have played in supporting household purchasing power (through labour market support vehicles, other transfer payments and tax cuts) and – via that extra power - for driving up house prices too (see figure 5 for a US example below). Since firming house price inflation has offered fuel for broader inflation outcomes in recent months, this is of note as well.

Figure 4: The next several years are projected to see a sizeable drag from fiscal policies in the G20

Figure 5: US house prices are influenced by swings in household disposable income growth

As for supply side congestion the latest batch of purchasing managers’ surveys suggest little scope for near-term relief. Those surveys published earlier this month for most major economies revealed lingering shortages of raw materials, longer vendor lead times and staff shortages. This in turn led to a further steep climb in unit costs and extremely sharp and broadly based rises in output prices.

This suggests that consumer prices could continue to climb in the immediate period ahead in these economies and that will provide further fuel to those that are arguing that the world’s inflation pressures could be longer lasting that many Central Banks (and private sector economists) have been forecasting.

There are, however, a few crumbs of comfort for those that are a little more sanguine about the inflation outlook from here. There has, for instance, been a steep plunge in the Baltic Dry Index in recent days – to a five month low. That suggests moderating container costs and easing port congestion. And that in turn could be a harbinger of a broader easing of global supply side congestion in the period ahead (see figure 6 below).

Figure 6: A steep plunge in the Baltic Dry index in recent days could be a harbinger of a broader easing of supply side congestion

The bottom line here is that inflation risks are still tilted to the upside. But the recent messaging from the world’s Central Banks alongside negative global growth revisions suggest that price pressures are beginning to exact a toll. As ever, what will matter most now is follow-through to wages and to inflation expectations. There has been some movement here but not enough – yet – to seriously imperil the status quo.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.

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