Further wave of pandemic delays recovery of the global economy

sky and clouds

The global economy lost momentum at the end of last year. In the euro zone in particular, a renewed wave of pandemic and bottlenecks in international supply chains caused the economy to slow down in the final quarter of 2021; the growth rate in the euro zone was just 0.3 percent compared with the previous quarter, following a strong 2.3 percent in the third quarter. In other major economies – particularly the United States – the economy still grew at higher rates in the fourth quarter. In the USA, however, the significant growth of 1.7 percent was also due to a sharp increase in inventories. After very low inventories in the summer, many companies apparently tried to replenish their stocks as best they could out of concern about continuing supply bottlenecks. In the emerging markets, too, the economy probably developed somewhat less dynamically in the fourth quarter of 2021, but in many places it was still solid. In China, for example, the economy grew by 1.6 percent despite the smoldering debt problems in the real estate sector. Growth was driven primarily by private consumption and exports, while investment was subdued, which is unusual for China. In India, too, the economy probably continued its recovery process in the fourth quarter of 2021. However, in other emerging markets – particularly Turkey and Brazil – growing inflation rates and economic policy measures to reduce them in particular are likely to have significantly dampened economic growth.

Against the backdrop of the omicron wave and continuing problems with international supply chains, the global economy lost further momentum at the beginning of the year. In addition, particularly in Europe, economic activity is being weighed down by the high level of uncertainty surrounding the further course of the Russia-Ukraine conflict. In the advanced economies, the pandemic in January probably dampened private consumption significantly through restrictions or voluntary behavioral adjustments. In February, however, there are now signs of a gradual easing of the pandemic situation in several countries. However, economic development is being hampered above all by the numerous work stoppages caused by isolation or quarantine, which could lead to interruptions in production or the transport of goods. Against this background, gross domestic product in many advanced countries is likely to increase only slightly in the first months of this year.

But in China, too, the economy continues to be severely impacted by the pandemic. The Chinese government is still taking particularly rigorous measures – such as sealing off entire cities – to contain the corona pandemic. One of the consequences of this is that temporary closures of production facilities or ports, for example, are repeatedly occurring, which is also delaying a normalization of international supply chains. Other countries are differently well prepared for the omicron wave. In India, Russia and Mexico, for example, only slightly more than half of the population has been vaccinated against the coronavirus. Vaccination rates in Central Eastern European countries are also mostly below those of other European countries. In addition, booster vaccinations are often less advanced in Central Eastern Europe.

Economic recovery continues in spring

With the onset of spring, the global economic recovery will gain more momentum. This forecast is based on the assumption that the ongoing pandemic wave in most advanced economies will gradually subside in the course of the spring and that the immunization of the population acquired through vaccination or surviving illness will prevent a strong resurgence of the pandemic. Most existing restrictions on social life will be lifted or replaced by less far-reaching requirements by the beginning of the second quarter. Individual behavioral adjustments to avoid infection will also be much lower, which will spur private consumption In less advanced economies, where vaccination campaigns to date may have used less effective vaccines, somewhat slower success in pandemic control is expected. This forecast also assumes that China will adhere to a much stronger containment policy than other countries. This will contribute to only a gradual reduction in international supply chain problems over the course of the first half of 2022.

Against this background, gross domestic product in the advanced economies will start to grow again at slightly higher rates from the second quarter. In the United States, however, the stimulus effect of the fiscal stimulus adopted in December 2020 and March 2021 is slowly running out, which will dampen private consumption and goods imports. In addition, high inflation – averaging 4.7 percent in 2021 – is reducing household purchasing power. In view of the rise in inflation, the U.S. Federal Reserve announced that it would phase out its securities purchase program in March and raise its key interest rates. Further hikes are likely to follow later this year. However, inflation will also gradually decline as fiscal stimulus is phased out and global supply chains gradually normalize. But inflation will still be somewhat higher in 2023 than in the years before the pandemic. The days of very low inflation are likely to be over, at least for the time being. The economies of Japan and the United Kingdom will also start to grow more strongly again from the second quarter. In Japan, further fiscal stimulus measures were adopted in November, providing an additional boost to domestic demand. In the United Kingdom, the further recovery is still being hampered by the consequences of Brexit and unresolved issues relating to the status of Northern Ireland.

Further recovery also in the euro area

Likewise, a noticeable economic recovery is foreseeable in the euro zone from the second quarter. Catch-up effects and the good situation on the labor market in many countries will support private consumption. In many euro area countries, for example, consumer confidence has declined only moderately despite the omicron wave. In addition, tourism will pick up noticeably again toward the summer, generating revenue for various European vacation destinations. The extensive reconstruction aid provided under the European Reconstruction and Resilience Facility will probably have only a minor effect on the economy in the short term, but will probably boost investment noticeably in the medium term. In addition, it currently looks as if the European Central Bank will continue to pursue its loose monetary policy and only gradually make it less expansive. Although it will probably phase out its securities purchases under the emergency purchase program launched at the start of the pandemic in March, it will probably temporarily increase its general securities purchase program at the same time and then gradually reduce it over the course of the year. An increase in key interest rates is not yet expected in 2022. Inflation in the euro zone, which rose to 5.1 percent in January in the face of higher energy prices – it averaged 2.7 percent in 2021 – will probably ease gradually in the course of this year; however, a rapid decline to the central bank’s two percent target is not expected for the time being.

In Central and Eastern Europe, too, economic momentum will pick up again in the spring. In the manufacturing sector, order books are well filled and purchasing managers’ indices were well above the expansion threshold at the beginning of January 2022, so as the pandemic subsides and the supply problem gradually resolves, production in the region should pick up significantly. Fiscal stimulus could also come from allocations from the European Recovery Fund over the forecast period.

In the emerging markets, the omicron wave is likely to dampen further economic recovery for somewhat longer than in the advanced economies. In China, further economic momentum will also be held back by country-specific factors. Above all, piled-up debts, especially in the real estate sector, are a drag on the Chinese economy. At least the government seems to have succeeded so far in preventing a major crisis, which would probably also have a major impact on the financial sector and the rest of the economy. In addition to the pandemic, various other emerging markets such as Turkey and Brazil are also struggling with a significant rise in inflation, which is severely dampening people’s purchasing power and growth prospects. Uncertainties regarding the further course of the Russia-Ukraine conflict and possible Western sanctions are weighing on the Russian economy. For example, the ruble has depreciated further against the US dollar and the euro, especially since the beginning of 2022. At least export revenues have increased due to the rise in oil prices and are easing the burden on the federal budget.

From the fourth quarter of 2022, the global economic upswing will lose some momentum and most advanced economies will gradually regain or exceed their long-term growth path. Economic output will also continue to grow solidly in China and most other emerging economies; however, in China in particular, growth rates are likely to be significantly lower than in the decade before the pandemic in view of the simmering problems in the real estate sector and a labor force that is no longer growing.

Downside risks dominate

Overall, I expect the global economy to grow by 4.3 percent this year. Next year, the global economy is expected to grow by 3.5 percent. As vaccination progresses, the downside risks relating to new pandemic waves have recently diminished, but remain elevated. For other reasons, too, the forecast as a whole remains predominantly subject to negative risks. In particular, there is a further risk that problems in international supply chains will persist longer than assumed, which would slow down the economic recovery and increase inflation risks. In particular, there is the risk of prolonged factory or port closures in China, and it is possible that the smoldering real estate crisis in China could worsen and spill over to the rest of the Chinese economy and other countries. Since Chinese real estate companies are highly leveraged and have high foreign borrowings, an increase in U.S. policy rates, for example, could worsen the situation. In other emerging and developing economies, there is a risk that pandemic-related economic dislocations and increases in private or public debt could lead to debt crises. In addition, the risk of geopolitical crises or even armed conflict has increased in some regions of the world. In particular, there is a possibility that Russia will attempt to annex parts of Ukraine, which would probably result in greater geopolitical tensions and, not least, a rise in oil and gas prices. In Asia, geopolitical crises continue to simmer around Taiwan and the Korean peninsula.

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