Key Forecast Trends

• The skew of risks around global growth has shifted markedly in recent months: from widespread optimism and upside risks to a more sober assessment of the outlook.
• China’s property market, the US debt ceiling and soaring energy prices in Europe all cloud the outlook. We’re also concerned that supply-side dislocations stemming from COVID-19 could be more pervasive and persistent than expected.
• So, while our numbers haven’t changed very much—we expect the global economy to grow by 5.9% this year before slowing to 4.2% in 2022—this stability masks an important change in the narrative.
• Of particular concern to us is the specter of a more challenging growth/inflation mix and a less certain outlook for monetary policy—one in which the only choices available to central banks are difficult ones.
• For now, we share the view that inflation is likely to fall back next year. But upward pressure on prices has already been less transitory than expected, perhaps hinting at a more fundamental shift in inflation dynamics.
• How central banks respond will depend on their tolerance for higher inflation and the extent to which inflation expectations are well anchored. That’s likely to mean greater dispersion—some smaller central banks have already tightened.
• But the key focus is the US Federal Reserve. As things stand, we don’t expect a US rate hike until 2023. But rapid tapering would, in theory at least, leave the door open for an earlier move—something else for markets to fret about.