Written by 11:39 pm Europe Economy

Tightening financial conditions will slow global economic growth and inflation

Recognizing that high inflation will not quietly go
away, the world’s major central banks are toughening their

Gradualism has given way to super-sized interest rate increases
and a clearer resolve to restrain actual and expected inflation,
despite adverse economic consequences. The more hawkish rhetoric
and policy actions have unsettled financial markets, driving up
term yields and risk spreads. In turn, equity prices have fallen in
an environment of weak corporate earnings and rising interest
(discount) rates. Meanwhile, the US dollar’s exchange value has
soared in response to rising US bond yields and investor flight to
safety; this is adding to inflation and financial stresses in
emerging and developing countries.

With financial conditions deteriorating, the economic
outlook for 2023 has dimmed.

We now project global real GDP growth to slow from 5.8% in 2021
to 2.8% in 2022 and 2.0% in 2023. The 2023 growth rate is revised
down 0.3 percentage point from last month’s forecast, reflecting
weaker outlooks for the world’s largest economies—the eurozone,
mainland China, Japan, and United States. The global situation can
be characterized as a growth recession, in which real GDP growth
falls short of potential growth (currently near 3.0%) and
unemployment rises. The period of weakest growth and highest
vulnerability will be in late 2022 and early 2023, when a new major
shock could tip the world economy into recession. While our
forecast does not anticipate a global recession, parts of the world
will experience recessions, including Western Europe and parts of
Latin America (e.g., Argentina and Chile).

Global Flash Global GDP forecast

If price inflation diminishes over the next two years,
approaching central bank targets, monetary policies will ease and
economic growth will revive. We project global real GDP to pick up
to 2.9% in both 2024 and 2025. The strongest gains will be in Asia
Pacific (4.6% in 2024 and 4.2% in 2025), led by India, Indonesia,
Vietnam, the Philippines, and Bangladesh. These countries will
benefit from regional free-trade agreements, competitive costs, and
efficient supply chains.

Inflation will subside as demand cools and supply
conditions improve.

Commodity prices drifted lower in early
September in response to rising interest rates, softening global
demand, and dollar appreciation. As of mid-September, our Materials
Price Index has fallen 23% from its early March peak. The retreat
in commodity prices is filtering downstream to intermediate and
finished products and will bring some relief to consumers in the
year ahead. Meanwhile, rising unemployment will restrain increases
in wage rates and prices of labor-intensive services. After picking
up from 3.9% in 2021 to 7.6% in 2022, global consumer price
inflation should ease to 4.8% in 2023 and 2.8% in 2024.

Western Europe faces a winter recession with high energy
costs and limited energy supplies.

After robust, consumer-led growth in the first two quarters of
2022, the eurozone economy stalled in the third quarter. The
temporary boost from pent-up demand for consumer services appears
to be fading, giving way to headwinds from energy supply and price
issues, the ongoing Russia-Ukraine war, tightening financial
conditions, and deteriorating confidence. With consumer price
inflation approaching 10% y/y this fall, we now expect that the
European Central Bank will raise its benchmark policy rate to a
high of 2.75% by February 2023 and hold it at this level for a
year. We expect eurozone real GDP to decline in late 2022 and early
2023, as households and businesses contend with soaring energy
bills and potential energy disruptions. Natural gas supply
curtailment would pose risks to Europe’s electric power, basic
metals, chemicals, plastics, glass, and ceramics industries. We
expect eurozone annual real GDP growth to slow from 5.2% in 2021 to
3.1% this year and 0.0% in 2023 before recovering to 1.9% in

The US economy faces an extended period of tepid growth
and rising unemployment.

Massive fiscal and monetary stimulus during the COVID-19
pandemic have sent US inflation to a four-decade high. Despite a
slight easing since June, consumer price inflation remained high at
8.3% y/y in August. The Federal Reserve is now determined to bring
inflation back to its 2% target and will likely raise the federal
funds rate to 4% or higher by the end of 2022. The US economy is
still expected to avert a recession, as tight labor markets support
sustained growth in consumer spending. However, rising financing
costs will lead to significant declines in residential and
commercial construction. We expect real GDP growth to slow from
5.7% in 2021 to 1.7% in 2022 and 0.9% in 2023 before edging up to
1.3% in 2024. With growth falling short of potential, the US
unemployment rate will likely rise from 3.7% in July to 4.7% in

Mainland China economic growth remains

After a setback related to COVID-19 lockdowns in the second
quarter, mainland China’s economy is expanding again. Industrial
production rose 4.2% y/y in August, while services output increased
just 1.8% y/y. Growth will likely remain constrained by the
government’s dynamic zero-COVID policy, a deep property sector
recession, and weakening export demand. The lift from stimulus
policies will be limited, as the government remains cautious owing
to concerns about high debt leverage. We project real GDP growth to
slow from 8.1% in 2021 to 3.3% in 2022 before picking up to 4.5% in
2023 and 5.5% in 2025.

Bottom line

Tightening financial conditions will lead to a further slowdown
in global economic growth, putting expansions in vulnerable regions
at risk and deepening anticipated recessions in Europe. The
combination of subpar economic growth, rising unemployment, and
improving supply chain conditions will cause inflation to subside
over the next two years.

Posted 22 September 2022 by Sara Johnson, Executive Director – Economic Research, S&P Global Market Intelligence

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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