The Peterson Institute for International Economics (PIIE) today announced its semiannual Global Economic Prospects, significantly downgrading global economic outlook relative to last October. Prospects for the United States have also been marked down as ongoing upside surprises to inflation have created the need for faster removal of monetary support.
PIIE senior fellow Karen Dynan forecast that global economic growth will step markedly down, with the brisk gain of 5.8 percent in 2021 followed by increases of 3.3 percent in both 2022 and 2023. US GDP is likely to grow 3 percent this year and a further 2 percent in 2023. The US GDP forecast for 2022 is about 1½ percentage point lower than the forecast presented last October. Dynan, former assistant secretary for economy policy and chief economist at the US Treasury Department, also projected that core US inflation will remain above the Federal Reserve's target of 2 percent over the next two years, but that it will moderate from a pace of 4.6 percent over the four quarters of 2021 to 4.1 percent in 2022 and then fall further to 3 percent in 2023.
After a year of recovery from pandemic-related weakness, nearly all countries are seeing a significant slowing of economic growth. Common factors weighing on the outlook around the world include setbacks from episodes of resurging COVID-19, disruptions from war in Ukraine, and the highest inflation in decades, which, in many countries, is necessitating a rapid transition from monetary support to neutral policy or beyond. Economic growth in several emerging-market countries is being additionally restrained by other factors. China is grappling with a downturn in its property sector, the Brazilian economy remains held back by political turmoil, and the Russian economy has been hobbled by the economic fallout from its invasion in Ukraine.
In the United States, GDP growth last year pushed the economy beyond its productive capacity, and inflation reached its highest level since the early 1980s. Underlying demand remains strong, bolstered by consumers making up for lost ground and savings accumulated during the pandemic. Dynan argued that demand needs to be restrained for inflation to moderate, and, hence, that the Federal Reserve is likely to raise rates aggressively over the next two years, with the federal funds rate reaching 4 percent in 2023. Tighter monetary policy will help cool the labor market, with Dynan projecting that the worker shortage will abate and that the unemployment rate will rise to 4.5 percent by the end of next year. Dynan also warned that recession risks are elevated given geopolitical developments and the potential for inflation to continue to surprise to the upside, which might induce an even more abrupt tightening of monetary policy.
PIIE senior fellow Chad P. Bown analyzed the ongoing challenges facing global supply chains, beginning with persistent macroeconomic challenges brought on by the pandemic, including for critical products like semiconductors. More broadly, COVID-19-related lockdowns in China pose new immediate-term threats, as does Russian's war on Ukraine and the responding Western sanctions, for global food security as well as for logistics.
PIIE senior fellow Steven Fries analyzed key energy aspects to the global outlook amid Russia's war on Ukraine. He began by looking at the tight global energy market just before the invasion, especially for natural gas. Following the onset of war and imposition of sweeping Western sanctions in response, energy market dislocations and price volatility increased, with Russian oil cargoes—even though largely unsanctioned—struggling to find buyers and trading at deep discounts. The search for alternative energy supplies rapidly intensified, but the depth of energy interdependence between Russia and Europe is not readily unwound. Looking ahead, Fries discussed prospects for rebalancing global oil and natural gas markets. In particular, he said the latter needs sustained investment in new capacity, leaving the European economy exposed to a large natural gas and electricity price shock and significant growth headwind. He also stressed that the oil market is likely to remain volatile amid a protracted war in Ukraine.
Michele Heller, PIIE communications and media relations manager, [email protected]
The Peterson Institute for International Economics is an independent nonprofit, nonpartisan research organization dedicated to strengthening prosperity and human welfare in the global economy through expert analysis and practical policy solutions.