Persistent inflation, supply chain constraints, the continuing pandemic and war in Ukraine signal a significant slowdown in global GDP growth this year but not a worldwide recession.
The litany of risks to the global economy is now well known: Central bank tightening, ongoing supply chain disruptions, persistent inflation, the lingering effects of a pandemic and a war in Eastern Europe. In normal times, any one of these could drag down global growth—but these aren’t normal times.
Under Morgan Stanley Economists' base case—what they consider the most probable—global GDP will end 2022 up 2.9%—less than half that of 2021.
In fact, says Morgan Stanley Chief Global Economist Seth Carpenter, we are in “the most chaotic, hard-to-predict macroeconomic time in decades.”
Global economic activity is slowing sharply—so much so that Carpenter and his team have revised their global gross domestic product forecasts down 170 basis points over the last three months—and the risks of further slowing are front and center.
Nevertheless, the team believes that the global economy will manage to avoid a true recession in 2022. Under their base case—what they consider the most probable—global GDP growth will be 2.9% in 2022—less than half that of 2021, when massive fiscal stimulus, accommodative monetary policy and COVID-19 business rebounds buoyed growth 6.2%.
For now, he says, the biggest risks—namely, a European embargo on imports of oil from Russia and persistent Covid lockdowns in China—are not likely to occur in tandem. “The alignment of those unlucky stars is possible, hence the rising risk, but it is not something we would count on,” he says.
Here's what’s behind Morgan Stanley’s midyear outlook.
With few exceptions, inflation is high in most of the world’s major economies, reflecting supply chain frictions, tight labor markets and successive waves of commodity price shocks.
Though commodity prices remain uncertain because of the war in Ukraine, supply chains should continue to normalize, suggesting that consumer goods inflation could subside later this year and into 2023. One notable exception to the generally high inflation data is China, where Covid restrictions have sharply curbed demand and are keeping inflation at bay.
Morgan Stanley 2022 Midyear Economic Forecasts vs. Consensus
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Central banks around the world have been raising interest rates and taking other measures to curb inflation by tightening financial conditions. That said, policy makers have been moving on different schedules:
- Central banks in Latin America and eastern Europe began raising rates last year to get ahead of the curve. Consequently, these areas should see peak rates late this year and start easing next year.
- The U.S. and other developed markets recently began raising rates—but are now facing a trade-off of high inflation and slowing growth.
- The European Central Bank is a notable laggard. However, Morgan Stanley economists think the ECB will end quantitative easing (i.e., buying bonds to keep credit flowing) and hike interest rates twice before the end of this year.
- In Asia, central banks are normalizing policy but not necessarily in sync. For example, the Reserve Bank of India (RBI) surprised markets with a hike in early May. Contrast this to Japan, where economists think the Bank of Japan will hold steady.
Given the growth headwinds, Morgan Stanley economists caution that the odds of their bear-case outlook unfolding are higher than a bullish turn of events.
“Against already sharply slowing growth, two substantial downside risks define our bear case,” says Carpenter.
First, the Russian invasion of Ukraine could lead to a “cutoff scenario” where all imported Russian energy commodities are abruptly embargoed by Europe—triggering a recession in Europe that could reverberate to other economies. “The hit to the U.S. from a contraction in Europe would come as the Fed has front-loaded policy tightening, leading to a technical recession,” says Chief U.S. Economist Ellen Zentner. “The drag from these two major economies would spill over to the rest of the world.”
The second major downside risk is the Covid wave in China and the 'Covid-zero' policy. “Our forecast of 4.2%Y growth for China this year is predicated on no further extended lockdowns of major cities,” says Chetan Ahya, Chief Asia Economist.
Meanwhile, any surprises to the upside are limited. A modest de-escalation in Ukraine could support business confidence, but a true resolution seems unlikely in the near term. Similarly, global supply chain repairs could accelerate growth, but with a key caveat: “Because central banks globally are already trying to slow growth to tame inflation, faster growth would bring a steeper path for policy that would partially offset the upside,” Carpenter says.
Most major economies, including the U.S., Europe, the United Kingdom and China, are each tracking toward GDP growth that will be half that of 2021.
On the extreme end, Russia is a clear contributor to declining growth—economists estimate that its GDP will decline 12% in 2022, the country’s steepest contraction since 1994.
There are some bright spots. “In Asia, outside of China, we generally see healthy economic activity, and this region looks to outperform to some degree,” says Ahya. India will see a slight stepdown from 2021 but is still on pace for 7.4% growth. GDP growth for Korea and Taiwan remains healthy. And while Japan’s 1.9% estimated growth for this year is modest, it is an improvement over last year.