“The global economic recovery remains strong, helped by government and central bank support and by progress in vaccination. But although global GDP has now risen above its pre-pandemic level, the recovery remains uneven with countries emerging from the crisis facing different challenges.” (OECD, Sept. 2021)
The world’s economic recovery, and even the recovery of the advanced economies, continues to be constrained by the slow international progress on the vaccination front and the defeat of the delta virus.
Indeed, the rapid spread of the delta variant has played a large part in the Organization for Economic Cooperation and Development (the OECD) sharply lowering its projections for the world economy to 4.5% in 2022 from an estimated 5.7% expansion this year.
The OECD also lowered its growth projections for most advanced countries and projected an even more pronounced economic slowdown for the US next year.
The US economy is projected to expand 6% in 2021 and only 3.9% in 2022. While under more normal circumstances a 3.9% growth rate would be applauded as extremely robust, but in the wake of the supply and other distortions caused by the pandemic, next year’s US projected growth rate is very disappointing.
China’s economy is projected to expand by 8.5% this year, and by 5.8% in 2021. The Canadian economy is expected to post 5.4% growth this year and 4.1% in 2022.
India is expected to post 7.9% growth this year followed by a 9.7% expansion in 2021. (India’s projections are based on a fiscal year basis which starts in April.),
The uneven progress across the world in vaccination obviously is putting the global recovery at risk. As well, employment virtually everywhere is still lower that pre pandemic levels, so the adjustment in labour markets has been painful.
Inflation is also rising in most of the advanced economies, and the inflation spike is clearly tied to unusual bottleneck problems. The trouble is it is hard to discern how long it will take for the supply shortages to clear up. As a result, the outlook for inflation is quite uncertain, and varies quite markedly by country.
Inflation has increased quite sharply in the US and some emerging market economies, but remains relatively low in many other advanced economies, particularly in Europe.
Economists generally accept that these inflationary pressures will fade as bottlenecks are resolved. The price increases in durable goods, such as cars, are likely to ease quickly as supply from the manufacturing sector rapidly picks up.
In the OECD projections, consumer price inflation in G20 countries will likely peak towards the end of this year, and then slow throughout 2022. Although sizeable pay increases are happening in some sectors that are reopening such as transportation, leisure and hospitality, overall wage pressure remain quite moderate.
One of the accompanying charts highlights the massive increase in shipping costs over the past year and a half. Global food prices have also increased sharply, and crude oil and mineral prices have similarly spiked up. As matters currently stand, new orders in these areas are obviously increasing while inventories are shrinking or remain rather tight.
As Adam Tooze recently observed in a Chart book article, “Whether we are living through the beginning of a new inflation is uncertain. What is clear is that we are living through a great inflation debate. I cannot think of a period in recent memory, in which there was so little agreement on likely future trends.”
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