International economy: fading pandemic storm should permit regions to swim in the same direction
Services should register the strongest growth rates, with travel, leisure and hospitality finally returning to their pre-pandemic levels as households enjoy their sustained mobility, with spending supported by previous fiscal support and continued strengthening of labor markets.
Global Market Strategist
As 2021 comes to a close, the global economy is registering solid momentum, with 88% of countries having a composite PMI over 50 in November versus only 71% in August. 2022 looks to be a second consecutive year of above-trend growth for the international economy, but with a key difference versus this year: more coordinated acceleration of momentum across sectors and regions. The global economy recovered to its prepandemic level of real output already in 4Q20, but since then pandemic waves have hit different regions at different times causing variation in when sectors and regions were ebbing and flowing. We may yet see a few more months of uneven growth as a winter wave of Covid-19 causes some fall in mobility in Europe, while growth accelerates in Japan and Southeast Asia as they leave behind their previous Covid-19 waves.
However, as 2022 progresses, the global economy should leave the storm of the pandemic behind due to a combination of naturally acquired immunity, accelerated vaccination rates, expected introduction of oral anti-viral pills and abandonment of “zero tolerance” approaches to the virus (with China potentially joining other Asian countries in doing so later in the year). By sector, services should register the strongest growth rates, with travel, leisure and hospitality finally returning to their pre-pandemic levels as households enjoy their sustained mobility, with spending supported by previous fiscal support and continued strengthening of labor markets. The hand-off of the baton from goods to services spending should ease the pressure on global supply chains, allowing businesses to re-stock their inventories. While for some items it may take the better part of the year for a full return to normal, incremental progress should support growth early on, as supply disruptions might have peaked in the third quarter. Lastly, the Chinese economy’s ability to find its footing will be key. Following its deceleration in the second half of 2021, growth should return to China’s new normal growth rate of near 5% early next year due to some targeted monetary and fiscal easing, as well as more visibility on the direction of reforms.
In addition to above-average global growth, 2021 is ending with above-average inflation, with only China and India seeing below-average inflation. September’s pop of 3.7% in global consumer prices (versus the 10-year average of 2.4%) is explained by higher than normal growth rates of energy, food and core goods prices. Throughout 2022, inflation should gradually normalize as the year-over-year comparison for energy and food prices becomes more challenging and as easing supply disruptions bring down goods prices. On the other hand, services prices should move higher due to the fading of the pandemic storm, keeping core inflation rates still somewhat elevated until the end of the year. By then, more structural disinflationary forces, such as technology, demographics and income inequality, should reassert their dominance. Ultimately, the new range for inflation this cycle will vary by country, depending on whether more structural forces like wages have turned (with more muted signs of this in continental Europe and Japan) and the extent to which inflation expectations have become unmoored (which will depend on central banks’ policy credibility, more so an issue for some emerging market high yield countries).
Overall, above-trend global nominal growth should characterize the year ahead. The more coordinated nature of the acceleration should cause some depreciation of the U.S. dollar, as capital flows to other markets looking for better valuations and returns ahead in this cycle. With that said, some exceptions of dollar strength can be expected during the year, as investors focus on some central banks lagging behind the interest rate normalization trend, especially those of Europe and Japan. Overall, the expected broader depreciation of the U.S. dollar should provide a currency boost to international returns for U.S. dollar-based investors.
Exhibit 3: As 2021 comes to a close, countries are accelerating more in sync
% of countries with composite PMI over 50, 3-month moving avg.
Exhibit 4: Global CPI should gradually normalize as the pop in energy and core goods fades
year-over-year % change