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Mainstream, VOL LX No 28, New Delhi, July 2, 2022

The Outlook for the Global Economy | Monaem Sarker

Friday 1 July 2022, by Monaem Sarker


The global economy is facing a series of obstacles this year, ranging from Covid-19 lockdowns in China, soaring energy and food prices, Ukraine crisis and a broadening drive by central banks to combat high inflation by increasing borrowing costs.

Slowing growth, scorching inflation and rising U.S. interest rates are intensifying a squeeze on emerging-market finances and stoking concern over a fully-fledged debt crisis in low- and middle-income countries. Emerging economies world-wide feel a financial strain after the Federal Reserve’s interest-rate increase with some facing the possibility of a debt crisis as global growth slows and hopes for a reprieve from rising inflation evaporate in our country Bangladesh also.

As COVID-related lockdowns are gradually lifted, we believe the worst of China’s economic slowdown could be in the past. May sentiment and activity data show tentative signs of an economic recovery, and we believe China’s economy could be headed toward a more normal growth trajectory in the second half of this year. We expect China’s GDP to grow by4.2% this year. With China’s economy stabilizing, we now believe the People’s Bank of China (PBoC) will not need to shift monetary policy in a more accommodative direction and the central bank will refrain from lowering Reserve Requirement Ratios for banks and other lending rates this year. But with the Federal Reserve tightening monetary policy and the PBoC keeping policy steady, we continue to forecast a weaker Chinese currency, albeit very modest renminbi depreciation through the end of this year.

Eurozone: The Eurozone economy was reasonably resilient in early 2022, and while we do not forecast a Eurozone recession, the onset on the Russia/Ukraine war potentially raises the risk of a sharper growth slowdown than we currently expect.

Eurozone Q1 GDP rose 0.3% quarter-over-quarter, matching the pace of growth in Q4, and increased 5.1% year-over-year. Eurozone employment was also quite resilient during Q1, rising 0.5% quarter-over-quarter and 2.6% year-over-year. There were, however, some concerning signs of a loss of momentum in March, as retail sales fell 0.4% month-over-month and industrial output fell 1.8%.

In contrast to slower growth prospects, Eurozone inflation appears likely to remain elevated for the time being. Given elevated inflation and clear signals of an early interest rate increase among ECB policymakers, we now expect the ECB to announce tighter monetary policy.

While we expect a relatively steady euro in the short term, our outlook remains for a softer euro over time. With the pace of ECB tightening set to lag that of the Fed’s, and also fall short of that priced by market participants, our outlook remains for the euro to revert to a softer trend over the medium term.

United States: Persistent supply shortages, a 40-year high in inflation and the Federal Reserve’s aggressive efforts to tame price pressures by raising interest rates are cooling the U.S. economy. An end to the war in Ukraine is not in sight. We expect oil price to continue to increase particularly in the near term. We may have not yet seen the peak in inflation after all.

COVID cases are again rising across the country. However, the advent of vaccines and other therapeutics will be enough to keep authorities from imposing new restrictions. We also assume that supply chain disruptions are not fully resolved until well into next year.

U.S. Q1 GDP was a significant downside surprise, contracting at a 1.4% quarter-over-quarter annualized rate. Nonetheless, the absence of fiscal stimulus, along with high inflation, means we expect a trend of slower growth going forward. We have slashed our projections for second-quarter output growth. We now estimate that GDP is on track to remain unchanged at an annual rate over the second quarter. Output fell at a 1.4% annual rate in the first quarter. We have also seen lowered U.S. GDP growth forecast for 2022 to 2.4%.

We look for the FOMC to hike rates by an additional 275 bps between now and early 2023. Higher interest rates will weigh on interest rate-sensitive spending. We look for real consumer spending on durable goods to slip 5% between late 2022 and the end of next year. We also forecast that the sharp rise in mortgage rates will cause housing starts to tumble.

The high rate of inflation is eroding consumer purchasing power. Consumers have financed solid rates of spending growth by bringing down their saving rates and by running up credit card debt, but these measures are not sustainable. We look for growth in business fixed investment spending to turn negative starting in the second quarter of next year, which coincides with the modest decline we expect will occur in payrolls. We forecast that the unemployment rate will rise from 3.5% in Q1-2023 to nearly 5% by the end of next year.

Our forecast has changed from an economic soft landing to a mild and relatively brief recession starting in mid-2023. The recession that we are forecasting for next year is not necessarily assured, nor is the magnitude and length that we anticipate. The recession, should it indeed occur, could actually be deeper and longer than we forecast. The stresses associated with an economic downturn can expose imbalances that hitherto had been largely undetected. These imbalances can then exacerbate the downward adjustment in the economy.

26 June, 2022

* (Author: Monaem Sarker is a Politician, Writer, Columnist & presently Director General, Bangladesh Foundation for Development Research)

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