Are stagflation and recession on the horizon for G7 economies?

Inflation forecasts for G7 countries and the Euro area skyrocketed over the past month, which, coupled with an expected higher interest rate environment, the ongoing pandemic, China locking down to contain fresh waves of Covid-19, and conflict in Ukraine, is weighing heavily on GDP growth. Although stagflation—elevated inflation in a low-growth environment—and a recession are not in the cards at the moment, the global GDP outlook has continued to darken in recent weeks. 

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Looking ahead, the global economy will continue to grapple with lingering supply chain disruptions in the near term, while commodity prices are projected to remain elevated, leading to longer and more pronounced inflationary pressures this year relative to 2021. Moreover, as central banks tighten interest rates dramatically this year, with further Covid-19 related shutdowns and a worsening of the war in Ukraine still possibilities, the global economic outlook may continue to deteriorate as we enter the second quarter of 2022.

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Commenting on the latest supply chain issues, Andrew Hencic, senior economist at TD Economics, noted:

“Timelines around a sustained improvement in supply chains have been pushed back yet again amid the war in Ukraine and Covid-19 surge in China—to what extent, only time will tell. What is clearer to us is that so much will depend on how the demand side of the equation evolves in the coming months. If we’re right in our forecast, U.S. goods demand is poised to cool significantly in H2 2022 and into 2023, helping to ease supply chains leaving them less vulnerable to supply-side hiccups.”

Commenting on the global economic outlook with regard to the war and the pandemic, analysts at HSBC noted:

“To say that the global economic outlook is exceptionally uncertain is undisputable. Global growth will clearly be weaker than it would have been and inflation will be higher, potentially significantly so. Already the swings in commodity prices and financial markets have been dramatic and volatility appears set to be a feature of the outlook for the foreseeable future. Economic forecasts could be in a state of persistently playing catch-up as world leaders take decisions that affect the macroeconomic outlook. The challenges facing the major central banks grow ever harder.”

 

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Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Author: Steven Burke, Economist

Date: April 1, 2022

Twitter @FocusEconomics

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