2022 Global Economic Outlook

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Macro insights

Economic outlook for 2022: Reflation, but feeling like stagflation

Rapidly rising global inflation and slowing economic growth are likely to fuel fears of stagflation over the coming months. While initially it may feel like we are heading towards a scenario of high inflation and stagnating growth, we expect the recovery to continue in 2022, albeit at a slower pace and with stickier inflation.

As we look ahead to 2022, should investors fear a return to stagflation — the toxic mix of high inflation and low growth that blighted the global economy during much of the 1970s — or are the sharp price rises and the slowing of the recovery only temporary? We expect this debate to intensify over the next five to six months as high energy prices, supply bottlenecks and labour shortages take their toll. There is no doubt that the global recovery is already slowing, as evidenced by the evolution of our Global Cycle Index (Figure 1), which has started to move downwards and is likely to go lower over the next three to six months — we expect it to move to the level indicated by the blue dot. At the same time, we anticipate that global inflation, as measured by the MSCI World Price Index, will stay high given the rise in energy prices — which could accelerate in the event of a cold winter in the northern hemisphere — and persistent supply constraints. Elevated energy prices are also a negative for growth, as they erode confidence and squeeze real incomes.

Figure 1

Climate insights

After the inflection point: How the climate challenge will transform the global economy

Wellington’s Central Macro Team believes climate change is an emerging megatrend that will reshape the global economy and that we will be studying from a variety of perspectives in 2022 and for many years to come. Recent headlines — from deadly flooding in China and Germany to historic wildfires and hurricanes in the US — are adding momentum to the trend.

From a policy perspective, political leaders and societies around the world have made up their minds: The time has come to begin the long, complex process of decarbonizing the economy. While that much is clear, we believe the significance of this macro inflection point, which will lead to massive changes in infrastructure spending, regulation, and geopolitical dynamics, is underappreciated. It will be decades before we know whether the ultimate objectives of decarbonization are realized, but in the meantime, investors should expect climate change to have ever larger and more material effects on economic growth, the cost of capital, and the performance of a vast range of companies and industries.

In this note, we outline the conclusions from a joint research project that our team, working closely with Wellington’s Climate Research Team, conducted on the global, regional, and geopolitical implications of reshaping the world’s economic framework for a lower-carbon future.

Geopolitical insights

Geopolitics in 2022: Turbulence ahead?

In my view, 2022 will present one of the most complex, unpredictable, and potentially dangerous geopolitical backdrops in decades.

Several factors drive this elevated risk, starting with structural changes in the geopolitical environment that include a more competitive world order, rising economic inequality, and political dysfunction globally. We are also witnessing the growing national security implications of climate change.

I believe that COVID-19 will still have a lingering impact. As we saw in 2021, the pandemic tends to accelerate geopolitical shifts and help shape events in new and surprising ways by contributing to diverging macro effects, ongoing supply-chain disruptions, cyclical and structural changes in labor markets, and varying inflation outlooks. Expect all this macroeconomic uncertainty to influence, once again, domestic policies and elections.

Authored by
John Butler
Macro Strategist
Thomas Mucha
Thomas Mucha
Geopolitical Strategist
Santiago Millán, CFA
Macro Strategist
Hong Kong
juhi dhawan
Juhi Dhawan, PhD
Macro Strategist