Macro monthly Sept 2021 | The global growth slowdown | Article – HSBC VisionGo
- Global growth is slowing as policy support is being reined in and supply shortages intensify
- This is adding to inflationary pressures, and despite still high COVID-19 cases globally, central banks are changing policy
- We have lowered our global GDP forecasts to 5.7% in 2021 and 4.1% in 2022; we introduce our 2023 forecast of 3.0%
Global growth is slowing, global inflation is rising and while the rollout of vaccines is now high or rising in many countries, the pandemic is still raging in places. But with the global economy having rebounded more swiftly than originally expected for more than a year, the period of ultra-loose monetary policy may be drawing to a close.
After a strong Q2, global GDP growth slowed in Q3
After robust Q2 growth, it is clear that global growth slowed markedly in Q3 (chart 1). The reasons relate to the pandemic itself: government-imposed restrictions, widespread supply disruptions, and the impact of higher prices on confidence and disposable incomes, but also a rapidly fading fiscal stimulus in some countries.
Reduced fiscal support is weighing on activity
The fiscal lift has already vanished in places, particularly in the emerging world. In some of the advanced economies, the lessening of government support is starting to weigh on activity and it will be an important factor in the coming year, particularly in the US where the bulk of the most recent fiscal stimulus package is already starting to fade.
China may see a modest revival in fiscal support
In the eurozone, however, there will be less of a step down in the fiscal impulse next year, as it was smaller than in the US and because of the EUR750bn Next Generation EU fund in 2022. But, we think there will be a modest revival of fiscal support over the next few months in China, as tightening measures to curb the housing boom have led to a slowdown.
Pandemic effects and lockdowns
The pandemic continues to weigh on growth
The direct impact of pandemic-related restrictions and disruptions continue to have a massive impact and the growth consequences have been apparent in recent months. Chart 3 shows the quarterly growth rates in Q2 and our estimates for Q3 in a range of economies. Apart from India, which seems to have bounced back strongly from the deep contraction in Q2, the eurozone is the only region where we estimate there has been no loss of momentum in Q3.
Elsewhere, the recovery has slowed or even had a major setback. The impact of the lockdowns across parts of mainland China, ASEAN, Australia and New Zealand over the course of the past few months is abundantly clear with consumer spending in particular falling back sharply.
Supply problems and inflation
Shortages are leading to higher inflation rates
For many months now reports of shortages have become more widespread, whether for semiconductors, container ships or labour, leading to higher inflation (chart 4) and squeezed disposable incomes. In Europe the recent surge in wholesale gas prices could even lead to another leap in inflation in the first half of 2022, while in China, forced production cuts by local governments in energy-intensive sectors likely drove producer prices higher in September.
The longer prices stay high, the more chance wages rise
Some of these higher prices could still prove “transitory” – used car prices and ‘reopening effects’ in hospitality are unlikely to keep inflation high in two years’ time – but the longer they stay elevated, the greater the risk of a wage response, especially if the labour market mismatches persist.
Central banks and financial stability
Central banks have started to raise policy rates
We think a return to low inflation is no longer certain and, despite still high COVID cases globally, central banks are now changing policy. Norges Bank became the first G10 central bank to raise rates, and we expect the Reserve Bank of New Zealand to follow by year-end and the Bank of England by February 2022. In Latin America the tightening cycles should have run their course by mid-2022, just as we expect to see some central banks in Asia start to edge higher.
Inflation overshoots could alarm investors
However, continued optimism in financial markets – despite scares over China’s property tightening and uncertainty regarding the US debt limit – implies great confidence that policymakers will take timely, appropriate action. But as the recovery continues, markets will be watching the growth, labour market and inflation releases to set their own expectations for the timing and magnitude of rate rises. Anything more than a moderate overshoot of the Fed’s inflation goals in 2022-23 could alarm investors if they fear that the Fed will need to move more quickly than priced in.
Our GDP forecasts
Our global growth forecast for 2021 is 5.7%
We have trimmed our global GDP growth forecast for 2021 to 5.7% reflecting downward revisions for US and large parts of Asia-Pacific but we have also made some notable increases to our forecasts for the eurozone and Brazil and Russia. We have also published our initial projections for 2023 for the first time.
2021 has been the bounce-back year and while our 2022 forecasts are for slower growth because of the scale of policy support provided, they are still above the pre-pandemic trend. But that does not mean there will be no economic scarring from the pandemic. Our economists have made their best stab at estimating the lasting damage to supply and demand from COVID-19 and our global GDP forecasts point to growth of 3.0% in 2023.
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