Central banks reducing emergency stimulus too quickly. And then, the supply chain disruption is among the top risks to the world economy. This is according to the economists. Given global growth has likely peaked. The recent surge in inflation will be transitory. But even though supply chain bottlenecks pose a serious threat to the recovery and there is scant sign.
The concern is after an extended period of record low rates and emergency policy. Central bank may get impatient and feel compelled for responding to the current spike in inflation. 13 of 25 central banks would raise interest rates at least once before the end of next year. Central banks dialing down stimulus too quickly was one of the biggest downside risks to the global economy. More supply chain disruptions or flare-ups in the pandemic, set to enter its third year in 2022.
Jan Lambregts, head of global economics and markets research at Rabobank said that many major central banks are now cautiously shuffling towards the exit. They aren’t doing this because of the strength of the economic recovery. Cost-push inflation appears to have set the wheels in motion at central banks. Getting this one wrong could therefore prove very costly in terms of maintaining their policy independence. Indeed, global growth was expected to slow to 4.5% next year. Growth was forecast to slow to around that pace in 2023, at 3.5%.
Janet Henry, global chief economist at HSBC said that the initial burst of activity linked to reopening is over. The growth momentum is rapidly losing pace. Fading fiscal support is playing a role. Despite the uncertainties, many central banks want to bring the era of ultra-loose monetary policy to an end. Most central banks are eyeing the exit. But there are some notable large exceptions.
The Bank of England, the Bank of Canada are expected to raise rates next year. The European Central Bank is predicted to hike in 2024. But the Bank of Japan is now forecast to do nothing with interest rates through the end of the forecast horizon. Economists upgraded inflation outlooks for 18 of 21 developed economies is by between 0.1 and 0.7 percentage points. The recent surge in global inflation was unlikely to persist over the next 2-3 years. Some respondents said that persistently higher inflation was likely, and among them over 60%.
Neil Shearing, group chief economist at Capital Economics said that it is likely that inflation will fall back in every major economy next year. But there is evidence that underlying inflation pressures are building. He doesn’t think that is the 1970s-style inflation episode. But when we look across all indicators in the labor market and the product market, they all point to price increases and a higher rate of underlying inflation. Growth in China, was projected to slow to 5.5% in 2022. Most other major emerging market economies were expected to struggle this year and next. Lloyd Chan, senior economist at Oxford Economics said that while developing Asian economies have been disproportionately hit by the Delta variant. They have shown some signs of a renewed pick-up as the cases fall. Still, the economies with low levels of vaccinations remain vulnerable.
