High inflation will persist this year, slowing global growth

 

Persistently high inflation will haunt the global economy this year, according to a poll of economists that have slashed their global growth outlook on fears of slowing demand and the risk of interest rates falling growing faster than planned so far. This represented a dramatic change from just three months ago, when most economists sided with central banks in their then-popular view that inflation spiked, a due to supply bottlenecks related to the pandemic, will only be temporary. In the latest quarterly survey of more than 500 economists conducted throughout January, economists raised their inflation forecasts for 2022 for most of the 46 economies featured access.

While price pressures are expected to ease in 2023, the inflation outlook has been much tougher than it was three months ago. At the same time, economists have revised down their forecasts for world growth. After expanding 5.8% last year, the world economy is expected to slow to 4.3% growth in 2022, down from 4.5% predicted in October, in part because of higher interest rates and costs of living. Growth is seen slowing further to 3.6% and 3.2% in 2023 and 2024, respectively.

Nearly 40% of those who answered an additional question singled out inflation as the top risk to the global economy this year, with nearly 35% picking corona virus variants, and 22% worried about central banks moving too quickly. “The odds of an accident have risen and the likelihood of a soft landing in 2022 requires some favourable assumptions and a modicum of good luck,” Deutsche Bank group chief economist David Folkerts Landau said, noting high inflation, the persistence of supply chain strains and the pandemic, as well as international political tensions.

This month`s Reuters polls found 18 of 24 major central banks were expected to lift rates at least once this year, compared to 11 in the October poll. The US Federal Reserve announced on Wednesday that it will raise the benchmark federal funds rate to a record high of 00.25% in March after ending its bond-buying program. The Bank of England is the first major central bank to raise rates since the start of the pandemic and is expected to act again; the Bank of Canada is also expected to raise rates soon.

In contrast, most economists expect the European Central Bank and the Bank of Japan to stay open until at least the end of next year. With the tightening cycle still in its infancy in developed markets, many emerging market central banks, with some notable exceptions such as Brazil and China, are waiting for a signal from the Fed while grappling with the pandemic and their own economic challenges.
“Over the past three decades, central banks in developed markets, led by the Fed, have tended to view supply shocks that stimulate inflation as a drag on growth that needs to be cushioned,” Joseph said. Lupton, global economist at JP Morgan noted. However, as major central banks fear bringing inflation expectations closer to their targets, emerging economies face a similar challenge. “Pressure on emerging market central banks to act to anchor inflation expectations is likely to increase,” Lupton said.

Growth prospects for more than 60% of the 46 economies polled have been revised downward or unchanged for 2022 and about 90% of respondents, 144 out of 163, said Their forecasts carry some downside risk. Although most countries forecast their growth to be lower in Q4 and the current quarter, largely due to the spread of the Omicron variant of the corona virus, they are expected to recover in the next quarter.