Global Economic Outlook : Worried Sick : Moody’s Analysis
Dhaka July 21 2022 :
Moody’s Analytics has published an analysis titled “Global Outlook: Worried Sick” authored by Katrina Ell, Senior Economist at Moody’s Analytics.
- The global economy has had a turbulent few years, and the tribulations have not receded.
- Concern is palpable that central banks will not be able to engineer a soft landing amidst the race to tame inflation.
- Growth forecasts have moved south over 2022, led by the U.S., Europe and China. Global GDP growth is forecast at 2.8% in 2022 in our July baseline.
- Emerging market outflows have increased in 2022. Since May, more Asian central banks have used off-cycle tightening to improve external stability and tame inflation.
The Asia-Pacific region is in a better position, with many countries still in expansion or recovery mode from the pandemic. But if conditions outside of the APAC region continue to deteriorate, recession risks will increase, particularly as exports are a critical growth driver, with the U.S. and Europe important sources of demand. Moreover, central banks in Asia are stepping up monetary policy tightening, which will increasingly pressure improved domestic demand.
Global Outlook: Worried Sick
Concern is palpable that central banks will fail to engineer a soft landing while taming inflation.
The global economy has had a turbulent few years, and the tribulations have not receded.
Concern is palpable that central banks will not be able to engineer a soft landing amidst the race to tame inflation.
Growth forecasts have moved south over 2022, led by the U.S., Europe and China. Global GDP growth is forecast at 2.8% in 2022 in our July baseline.
Emerging market outflows have increased in 2022. Since May, more Asian central banks have used off-cycle tightening to improve external stability and tame inflation.
The global economy has had a turbulent few years, and the tribulations have not receded. Although the adverse economic impacts of the pandemic are easing, other challenges have come to the forefront. Inflation has
surprised on the upside, especially for energy and food. Central banks have mostly jumped on the tightening bandwagon, moving more aggressively than what was anticipated a few months ago. This has numerous ramifications.
Global GDP growth has been downwardly revised. Financial market conditions have tightened, and emerging market outflows have stepped up as interest rate differentials with the U.S. Federal Reserve widen. Businesses and households have come under increasing pressure, particularly lower-income earners who didn’t accumulate a decent precautionary savings buffer during the pandemic.
Concern is palpable that central banks will not be able to engineer a soft landing amidst the race to tame inflation. The Moody’s Analytics business cycle status for July shows that major economies, including the U.S., U.K., Canada, Mexico, Brazil, and much of Europe are at risk of recession.
The Asia-Pacific region is in a better position, with many countries still in expansion or recovery mode from the
pandemic. But if conditions outside of the APAC region continue to deteriorate, recession risks will increase,
particularly as exports are a critical growth driver, with the U.S. and Europe important sources of demand.
Moreover, central banks in Asia are stepping up monetary policy tightening, which will increasingly pressure
improved domestic demand.
Anxious businesses and households
Given the heightened risk of recession, it’s not surprising that global businesses have become more anxious.
The weekly Moody’s Analytics business survey confirms that sentiment has been deteriorating since early 2022.
Consumer sentiment for major economies has also deteriorated this year.
There is not always a strong causal link between sentiment and the real economy. With so much thrown at households and businesses over the past two years, there is heightened risk that this ongoing anxiety will contribute to a deterioration in hiring, investment and spending. This concern has increased weight—business expectations for economic conditions six months ahead are expected to deteriorate markedly and are at the lowest level since the global financial crisis in 2009.
Growth expectations move south Global GDP growth is forecast at 2.8% in 2022 in our July baseline, down from 3.2% in our March forecast.
Downward revisions are broad-based. U.S. GDP growth is forecast at 1.9% in July, 1.3 percentage points weaker than our expectation in March and are driven by higher inflation eating into purchasing power, a more
aggressive Federal Reserve, and a cooler labour market.
Meanwhile, our euro zone GDP growth forecast has weakened to 2.8% in 2022, encouraged lower by the region’s disproportionate exposure to the fallout from Russia’s invasion of Ukraine. Sanctions on Russia that cause price spikes and supply concerns, including for critical food and energy, cloud the near-term outlook.
Consumption in the euro zone will take even longer to return to pre-pandemic levels.
China’s economy has been turbulent and volatile in the first half of 2022. Manufacturing and services faced significant challenges, particularly in April as aggressive and extended lockdowns in large cities took place. COVID-19 control measures caused significant disruptions and led to a large drop in consumption, investment and production. Localised lockdowns since then have been disruptive to a lesser degree.
The second half of 2022 looks equally as challenging for China despite policymakers pledging support. The People’s Bank of China has pledged to do what it takes to improve the demand environment. Fiscal policy has also been expansionary. But stimulus to date has had limited potency. The zero-COVID policy is an ongoing headwind because the threat of further lockdowns has increased near-term uncertainty, making businesses and households reluctant to invest and spend. Pandemic responses have repeatedly shown that stimulus cannot completely insulate economies from lockdowns. Despite this, China is prioritising public health concerns over economic consequences.
The property market is a useful example of stimulus lacking potency. Despite local governments easing buying curbs, cutting lending rates, and partially relaxing ownership rules, house price growth remains weak. The property market is an important driver of China’s economy, accounting for about 25% of GDP. We expect band-aid policy solutions to be introduced over the second half of 2022, but these are unlikely to be sufficient
to reinvigorate the economy to achieve the GDP growth target of 5.5%. In our August baseline, we will downwardly revise our full-year GDP growth forecast to south of 4%. This contrasts with the government’s 5.5% target.
Inflflflflation peak near?
Eye-watering headline inflation stings across the globe. U.S. CPI growth surprised on the upside by hitting 9.1% y/y in June, its strongest since the 1980s. In Europe, the spike in energy and food costs is clear and broad across the region. The euro zone’s harmonised index of consumer prices inflation rate came in at 8.6% y/y in June, significantly stronger than the 8.1% y/y rate in May. There was modest relief for Germany last month, with headline CPI growth cooling to 7.6% y/y from 7.9% previously thanks to a temporary discount on public transport tickets and a reduction in petrol and diesel taxes. But Spain was hit hard, with CPI growth accelerating to 10.2% y/y in June—its fastest since 1985.
U.K. CPI continues to climb. Headline CPI growth hit 9.1% y/y in May, from 9% in April. Emulating the global trend, food and energy drove the price gains. Energy costs climbed 53% y/y in May. CPI growth is forecast to hit 11% by October, after another increase in the Office of Gas and Electricity Market’s electricity price cap.
Central banks are off and running
Central banks across most of the developed world are racing to contain inflation. The supply-side nature of the price surge complicates matters, as monetary policy tightening targets the demand side. Although longer-term inflation expectations have receded in the U.S., bringing some comfort to the Fed, the upside surprise in the June inflation print was an unwelcome development and added to signs that price pressures have broadened and look more entrenched in some categories. The federal funds rate is expected to average 2.8% in the December quarter. The Bank of England is also being aggressive, with the policy rate expected to average 1.7% in the December stanza.
The European Central Bank is less further along. We expect its policy rate to average 1.2% in the December
quarter. Central banks in Central and Eastern Europe have been the most aggressive in their quest to quell inflation.
The Asia-Pacific region has not escaped higher inflation. New Zealand’s CPI growth hit a 32-year high in the
June quarter at 7.3% y/y. This was despite the Reserve Bank of New Zealand being one of the most aggressive
in the region in its mission to tame inflation. Unlike economies in Southeast Asia and North Asia, demand-pull inflation is running hot in Australia and New Zealand, forcing this pair of central banks to consider the most aggressive tightening paths in their history.
Latin America is also suffering surging prices. Brazil’s CPI growth hit 11.9% y/y in June, keeping well above the
central bank’s 3.5% target. Others in the region, including Colombia, Chile, Peru and Mexico, have seen significant gains in the past year, forcing aggressive central bank responses. Colombia’s central bank has hiked its policy rate by a cumulative 350 basis points since March as inflation surged beyond expectations.
Our baseline forecast is that inflation will peak for most economies around midyear but remain relatively elevated through 2023. Underlying this assumption is that oil prices have passed their peak but will remain high for the remainder of 2022, along with other commodity prices. Prices of other critical food products,
including wheat and corn, have eased from their peak amidst easing global-supply concerns.
Emerging markets left reeling
Emerging markets have fallen out of favour because of widening interest rate differentials with the Federal
Reserve and risk aversion amidst heightened concern about the health of the global economy.
Although some emerging market economies have benefited from Russia’s invasion of Ukraine via higher commodity prices, there is still pressure on central banks to tighten policy settings and reduce capital outflow pressure. Off-cycle tightening has increasingly featured in Asia since May.
Indonesia Currencies across most emerging markets have fallen against the U.S. dollar this year. The Philippine peso slumped to its lowest since 2005 before the Bangko Sentral ng Pilipinas delivered an off-cycle 75-basis point hike in July. The Bank of Thailand is one of the few remaining hold-outs in Asia and is expected to come off the sidelines in August to quell weakness in the baht, which is hovering around its lowest level since 2015.
Please note that this analysis has been authored by Moody’s Analytics, which operates independently of the Moody’s Investors Service credit rating agency.