2022 Global Macro Outlook: Growth Despite Inflation - Morgan ...

2022 Global Macro Outlook: Growth Despite Inflation · The surge in global inflation has investors fretting about future growth, but Morgan Stanley economists say ... Research Dec9,2021 2022GlobalMacroOutlook:GrowthDespiteInflation Tweetthis SharethisonLinkedIn SharethisonFacebook Emailthis Printthis Thesurgeinglobalinflationhasinvestorsfrettingaboutfuturegrowth,butMorganStanleyeconomistssaypricesurgeswillsubside,makingwayfor4.7%globalGDPgrowthin2022.Here’stheviewontheglobaleconomy. It'simpossibletotalkaboutthe2022globaleconomicoutlookwithoutaddressingtheproverbialelephantintheroom:inflation.Fordecades,significantpricegrowtheludedmostmajormarkets.Then,suddenly,asurgeindemandcomingoutoftheCOVID-19recession,coupledwithlingeringsupply-chaindisruptionsandlaborshortages,createdaperfectstormforpriceincreases. Inflationfordevelopedmarketsisontracktoreach4.7%attheendofthisyear—notaninsignificantnumber—andinatypicaleconomiccycle,thiswouldbeaclearsignalforcentralbankstoraiseratesandpumpthebrakesongrowth. Thenagain,thiscyclehasbeenanythingbuttypical.“Thingsarenormalizing,”saysMorganStanley'sChiefGlobalEconomistSethCarpenter,“buttheyarenotnormal.” Whileinflationdynamicswillvarybycountryassupplychainsandlabormarketsstabilizeatdifferentrates,theeconomicsteamatMorganStanleyResearchforecaststhatinflationinmajormarketswill“peakthenretreat”bymorethantwopercentagepointsoverthecourseof2022. Monetarypolicyislikelytotightenbutlessthaninvestorsfear,whilestrongcapitalexpenditures,improvingsupplychainsandothernormalizingforcesadduptoMorganStanley'sabove-consensusoutlookof4.7%GDPgrowthfor2022. RelatedReading Research 2022GlobalStrategyOutlook:FundamentalsWillDominate WealthManagement 2022Outlook:TheGreatRebalancing ThoughtsontheMarketPodcast 2022GlobalCurrencyOutlook:TheTrickisinTheTiming MorganStanleyRealGDPForecasts(Year/Year) GDP(%Y) 2021E 2022E 2023E MS MS Consensus MS Consensus Global 6.1 4.7 4.3 3.8 3.6 G10 5.0 4.4 4.0 2.9 2.2 U.S. 5.5 4.6 4.0 3.7 2.4 EuroArea 5.2 4.6 4.3 2.5 2.1 Japan 1.9 2.9 2.6 1.6 1.3 UK 6.9 4.6 5.0 1.6 2.0 EM* 6.9 4.9 4.6 4.5 4.7 China 7.8 5.5 5.0 4.8 5.4 India 8.9 7.5 6.8 7.3 7.2 Brazil 4.8 0.5 1.0 1.8 2.0 Russia 4.4 2.7 2.5 2.5 2.1 Source:Bloomberg,HaverAnalytics,IMF,MorganStanleyResearchforecasts.Note:AggregatesarePPP-weighted.BrazilconsensusnumbertakenfromBCBmarketexpectationssurvey.Chinaconsensusreflectsasubsetofpeers. SupplyChainDisruptionsShouldDissipate Globally,supplychaindisruptionsareamajordriverofrecentinflation,and“basedonsurveysandfeedbackfromourequityanalysts,webelievewearenowat,orcloseto,theworstlevelofsupplychaindisruption,”saysCarpenter. Strongglobalinflationnow,butrecedingnextyear Source:HaverAnalytics,MorganStanleyResearchforecasts;Note:TheglobalaggregateisaweightedaverageusingPPPweights. IntheU.S.,ChiefU.S.EconomistEllenZentnersaysthatU.S.supplychainsareonthevergeofrecoveryandthatcommoditypriceincreasesarealsosettosubside.TheU.S.economicsteamsaysastrongcapexcycle,increasedinventory-buildinganddeferreddemandshoulddriveU.S.GDPgrowthof4.6%for2022. Thisisn’ttosayallinflationistransitory.PricesforsomecategoriesintheU.S.—includinghousing—areexpectedtocontinuerisingtoreflectnormalcyclicaldynamics.“Thekeydistinctioninourmindsisthattemporaryinflationismeasuredinmultiplepercentagepoints,whereasthepermanentriseininflationismeasuredintenths,”Zentnersays. EuropeanInflationIsFleeting Soaringdemandandthehangoverofsupplyconstraintsareaffectingglobalmarketsdifferently.InEurope,forexample,MorganStanleyeconomistsseeinflationdroppingfrom4.1%attheendof2021to3.1%bythefirstquarterof2022,andeventuallydippingbelowtheEuropeanCentralBank's(ECB)targetinflationrateof2%.“EvenwithcontinuedstrongEuropeangrowthnextyear,andatighteninglabormarket,weexpectcoreinflationtobebelowtheECB'stargetin2023,”saysEuropeaneconomistJacobNell,whoattributesthisinparttothelingeringeffectsofpersistentlylowhistoricalinflation. Thatsaid,theEuropeaneconomyisontracktorecovertoprepandemiclevelsbytheendofthisyearandispoisedfor4.6%GDPgrowthin2022,asastronglabormarketsupportsimprovingconsumerspending. MonetaryTighteningWillBeModerate AssumingthatinflationandeconomicgrowthtrackwithMorganStanleyforecasts,developedmarketcentralbankslikelywon'ttakedrasticmeasurestodampengrowth. WhiletheU.S.FederalReservehasstartedtaperingitsassetpurchases,MorganStanleyeconomistssaytheFedwilllikelywaituntilSeptember2022toraiseinterestrates—andthattheECBcouldholdoffuntillate2023.Elsewhereintheworld,manycentralbankshavealreadystartednormalizingmonetarypolicy.“Butwedonotthinkbankswillabruptlysetratesbacktoneutral,letaloneintoarestrictivestance,”Carpentersays. Meanwhile,businessinvestmenthasrecoveredfasterthanglobalgrowthandmoresignificantlythaninrecentdownturns.“Recoveriesdrivenbyinvestmentspendingcanbedurable,andifnewcapitalinvestmentembodiesgreatertechnologicaladvancement,thenproductivitycouldbeboostedaswell,furtherlesseninginflationarypressuresandallowingstronggrowthtocontinue,”headds.TheseandotherfactorscouldkeepglobalGDPonapre-COVIDpath.  GlobalGDPtoreachthepre-COVIDpathin3Q23 Source:HaverAnalytics,IMF,nationalsources,MorganStanleyResearchforecasts;Note:Thepre-COVIDGDPpathreferstothetrajectorythatglobalGDPwouldhavefollowedpriortotheCOVIDshockandiscalculatedusingMorganStanleyResearchforecastsasofJan.21,2020. TakingtheLongViewonLabor Secondtoinflation,laborconstraintsarealsoaprimaryconcernforinvestors,andthetwooftengohandinhand.LaborchallengesaremostprevalentintheU.S.,buttheworstmaybeover. “Weexpectatypicalcyclicalrecoveryasthepandemicrecedesandtheeconomicrecoverycontinues,”saysZentner,whogivesthecaveatthatanagingpopulationwillcontinuetocreatelaborchallenges.“Prime-agelaborparticipation—ages25to54—hasalreadybeguntorise,andimprovingchildcare,fallinghealthrisksandrisingwagesshouldacceleratethattrend.” U.S.laborforceparticipationhasbeenslowtocomeback,thoughprime-ageparticipationshouldexceedpre-COVIDlevelsin2H22 U.S.laborforceparticipation(%) Source:BLS,MorganStanleyResearchforecasts AsianEmergingMarketsBackinBusiness Broadlyspeaking,MorganStanleyeconomistsbelieveemergingmarketgrowthwillremainstrongintheyearaheadwithGDPgrowing4.9%forallEMmarkets,thoughslowgrowthinBrazil(0.5%)andRussia(2.7%)dragdowntheaverage. Infact,theoutlookisconsiderablybetterforAsianemergingmarkets,withGDPgrowthintheAsiaregion(excludingJapan)outperformingat5.7%. IndiaandIndonesiaarereboundingstrongly,helpedbybusiness-friendlystructuralreforms,strongcapitalinvestmentsandrisingvaccinationrates. “Weexpectafully-fledgedgrowthrecoverywithalldriversfiringandmacrostabilityindicatorsremainingrange-bound,”saysChiefAsiaEconomistChetanAhya,whoseteamisforecasting7.5%GDPgrowthforIndiain2022.InNorthAsiaeconomieslikeKoreaandTaiwan,theoutlookisbolsteredbystrongdomesticgrowth,coupledwithaglobalbacklogindemandforsemiconductors.  ChinaMarchestoItsOwnBeat Growthintheworld’ssecond-largesteconomy,China,isnowataninflectionpoint.In2021,withdrawalofpolicysupportandawide-rangingregulatorytighteningacrossproperty,carbonemissionsandtechsectorshavesloweditsexpansion.  China'sregulatoryresetcouldknockdown2022-25GDPgrowthby40bp (ChinaGDP) Source:CEIC,MorganStanleyResearchestimates “Thekeyfactorinouroutlookisthattheslowdownwaseffectivelycausedbypolicytighteningandweexpectthereboundtobedrivenbypolicyeasing,”saysRobinXing,ChiefChinaEconomist.“TheRegulatoryResethasalsomovedtoamoreinstitutionalphase.Thisimpliescalibratedimplementation—ratherthannewaggressivemeasures—wouldbethenextfocus.” TheChinaEconomicsteambelievesgrowthwillrecoverto5.5%nextyear,whichishigherthantheconsensusbutsignificantlylowerthanChina’srecentpast.Thereafter,China’sGDPgrowthwilllikelyslowto4.8%in2023andhoverjustabove4%fortheforeseeablefuture. 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