In early 2022 the predominant global concern is likely, once again, to be a surge in Covid cases – the fourth such wave. To some extent the world economy has grown accustomed to dealing with Covid. Global economic growth slowed very sharply in the first wave from March 2020 onwards but has been more resilient in subsequent outbreaks. The potential for a recovery later in 2022 remains and we see overall GDP growth at around 4.5% for the advanced economies and slightly faster than that in the emerging economies.
That assessment is based on three expected developments. First, we see a recovery in consumer spending on services such as entertainment, travel and live events. Across the main advanced economies, the latest data (to the third quarter of 2021) show such spending still below its pre-pandemic level. Consumers have the ability to spend, given the household savings that have been accumulated during the pandemic and the increase in wealth due to asset price increases.
The extent to which this translates into higher spending depends, of course, on consumer confidence and the willingness to spend. Survey data from purchasing managers showed some improvement in the services sector before the spread of Omicron suggesting that such spending was already starting to recover. It remains to be seen how resilient this proves to be, but we are optimistic.
Second, we expect an easing of supply chain pressures, allowing pent-up demand for some goods to be satisfied and inventories to be rebuilt. The car and consumer electronics industries are two areas where such pressures have been most intense.
Third, the need for green infrastructure spending is substantial. To meet the objective of net zero carbon emissions by 2050, such spending is estimated at USD 4 trillion per year for the next quarter century, USD 100 trillion in total. The fact that government bond yields, in both nominal and real terms, remain so low suggests that there is still a global savings glut which can be deployed to meet these infrastructure spending needs.
Two other big longer-term questions about the global economy are also pertinent. First, whether globalisation is under threat, especially as a result of the trend to reshore production. Our view is that there are limits to the extent this can take place, particularly because of a lack of skilled labour in those countries seeking to reshore and the complex nature of global supply chains. Global trade in goods is likely, we think, to continue to grow at a rate similar to that seen in the period 2012-2019, with potential for faster growth in services.
Second, whether the importance of the emerging economies in driving global growth will continue. In practice, only two emerging economies – India and China – have accounted for all the decline in the advanced economies’ share of global GDP since 2000. We are optimistic that other emerging economies, propelled by the adoption of digital technologies, can now catch up.
To discover more about our economic views and such challenges they are facing as well as a special focus article on if we are running out of workers, access the full Quarterly Market Review here.