News in Charts: Downside risks abound for the global recovery

Fathom Consulting has created a large database of economic and financial market charts, which provide unique insight into the global economy, including comparisons between countries. These are available on Refinitiv’s Datastream Chartbook, under ‘03. Global data – 01. Macro and 02. Financial Markets’. A selection of these charts is shown below.

Recovery from the pandemic-induced recession has so far been rapid. Generous fiscal support packages, particularly in the major economies, have enabled this swift bounce back. The global economy is estimated to have expanded by some 6.0% in 2021, after contracting by more than 3.0% in 2020. Now, however, the global economy is facing increasing headwinds. In January, the IMF revised down its forecast for global growth this year by 0.5 percentage points, to 4.4%. In Fathom’s most recent central scenario, issued in March, economic activity stagnates later this year in a number of major economies. This reflects a combination of tighter monetary policy and a reduction in the supply of energy, particularly in Europe. We expect to see global growth of around 3.5% this year. Given developments since January it seems possible that the IMF will also revise down its forecasts in the next World Economic Outlook, due to be published on 19 April.

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Global trade is currently above its trend, but it may soften a little this year. Trade volumes slumped amid the onset of the pandemic, as countries enacted strict lockdowns, but then recovered sharply, initially boosted by the surge in demand for medical equipment and electrical goods in advanced economies, and then experiencing further tailwinds from recovering global growth.  Now however a combination of slower growth and a greater focus on supply chain resilience, both for economic and geopolitical reasons, which is likely to lead to some movement of supply chains closer to home, are set to slow trade somewhat.

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The rise in inflation that most countries are now experiencing has been driven by a number of factors. The surge in demand for goods in advanced economies triggered major supply chain bottlenecks and fuelled a noticeable pick up in goods price inflation, while the global recovery has led to a sharp increase in commodity prices. Very tight labour markets have also driven strong wage growth in a number of countries, including the US. Inflation is significantly above central bank targets in most advanced economies (Japan is a clear exception). In China consumer price inflation remains subdued, however, amid weak demand and food price deflation.

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Fears that this period of materially above-target inflation will become embedded into expectations of higher future inflation, and become sustained, have led a number of central banks to rein in their monetary accommodation. Emerging markets have generally led the way, with a number of countries hiking rates aggressively. In contrast, advanced economy central banks have been behind the curve. Last month, for example, the FOMC voted to raise the federal funds target rate for the first time since December 2018. Fathom’s own analysis shows that, over the past 30 years or so, US monetary policymakers have typically begun to tighten when inflation has been just over 2% and the real rate of interest has been just under 3%. When the federal reserve made its move last month, inflation was 7.9% and the real rate of interest was minus 7.6%.

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Fiscal policy has also become less supportive of growth, as measures to support households and firms during the pandemic have been phased out. Fiscal policy was most supportive in the advanced economies, where the government debt-to-GDP ratio soared by around 15 percentage points to 116% in Q3 2021. The rise in government debt-to-GDP was more modest in emerging markets, but is also very high by historic standards. Amid modest recoveries in many emerging countries, financing government borrowing could become much trickier as the Fed’s tightening cycle gathers steam.

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After the strong post-pandemic rebound in global economic activity in 2021, growth is likely to slow substantially this year, as monetary policy is tightened to combat rising inflation. A contraction in economic activity, globally, is not our central case but it is a clear risk. Indeed, further reductions in the supply of energy could potentially tip parts of Europe into recession. Meanwhile, China’s economy is grappling with a real estate slump and the largest rise in Covid-19 cases since early 2020. Against such a backdrop, Fathom remains in a risk-off mode.

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