Global Macro Outlook - First Quarter 2022

What You Need to Know

Entering 2022, COVID-19’s lingering shadow continues to snarl global supply chains while idle workers remain choosy in rejoining the labor force. Meanwhile, inflation persists, which leaves policymakers in the awkward position of tightening without pushing economies back into the sluggish pre-pandemic growth environment.

Key Forecast Trends

Our outlook for 2022 reflects our belief that tighter monetary policy will have an impact on the global economy, particularly with fiscal support waning.

We expect growth to slow significantly from the heady levels of 2021, driven largely by tighter policy and fading fiscal support.

Overall return levels are likely to be lower in 2022 compared to 2021, but the global growth outlook is solid enough to prevent financial markets from rolling over completely.

Emerging-market central banks have begun the tightening process, with more to come, but we see scope for EM to regain a meaningful growth differential with the developed world eventually.

Forecast Overview

Key Assumptions

COVID-19: the omicron variant will extend supply disruptions, keeping prices elevated for now.
Fiscal policy: fiscal policy is unlikely to provide a pro-growth impulse in most jurisdictions as inflation concerns predominate.
Monetary policy: central bankers have pivoted toward tighter policy, moving in that direction until inflation eases.
Secular backdrop: long-term demographic trends remain unfavorable and populism is likely to impact policymaking.

Central Narrative

Global growth: robust early in the year but likely to decelerate as tighter fiscal and monetary policy bite later.
Inflation: elevated for the first part of the year but likely to come off the boil in the second half of the year.
Yields: gradually moving higher, but slower growth and inflation to keep yields historically low throughout the year.
USD: stronger against the euro and the yen, where monetary policy will be slower to react. Mixed to weaker against other currencies.

Key Upside Risks

If inflation falls faster than expected, central banks may not need to tighten much.
A transition to a durable world in which COVID-19 is endemic not pandemic could reduce economic headwinds.

Key Downside Risks

Tighter monetary policy could bite harder than expected.
A more pernicious COVID-19 variant could undo much of the progress made in the last year.
Political sclerosis in the US.

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