• As vaccination rates rise, COVID-19 restrictions have been reduced
• 2021 in brief: Robust rebound and record growth
• Recovery is not yet complete while COVID-19 and inflation risks remains
• 2022 is set to be another good year for growth, albeit the recovery is likely to remain unbalanced
• Economy ahead: Unclear road, clearer destination
• Inflation: Prices to rise, then decline
• Fiscal policy support fades in 2022
• Divergent monetary policy outcomes
• Risks to the growth

Overview

Conditions are in place for a sustained global recovery. The spread of the Delta variant of COVID-19 through the middle of the year had set this recovery back in some countries, but only temporarily. Rapid increases in vaccination coverage in many countries have allowed restrictions to be eased, and economic activity has bounced back strongly. Alongside these better health outcomes, expansionary fiscal and monetary policy have assisted the recovery and continue to support the outlook.

The ongoing rollout of COVID-19 vaccines and significant policy stimulus has laid the groundwork for a sustained global economic recovery. Activity has generally recovered quickly once vaccination coverage has risen, allowing mandated restrictions and health concerns to be eased. GDP is expected to return to its pre-pandemic trend in many advanced economies over the next year, but a number of emerging market economies are likely to still be short of pre-pandemic trends. Health-related risks remain an uncertainty for the period ahead.

Global goods demand has remained strong even as services activity rebounds. This has strained global supply chains and logistics networks, as have disruptions to supply in some sectors. These capacity constraints have been surprisingly persistent. In recent months, shortages in energy markets in Europe, the United Kingdom and China have added to these issues, and have constrained production in downstream industries such as manufacturing.

Capacity constraints in many countries could result in the recent increase in global inflation pressures persisting for longer than initially expected, and pose a downside risk to the growth outlook. Strong global demand this year has run up against a lack of spare capacity in manufacturing and transportation networks, while shortages have also emerged more recently in energy markets. Base metals and other goods with energy-intensive production processes have been especially affected. As a result of these bottlenecks, many commodity and producer prices have risen sharply. Some economies have also experienced a pick-up in wages growth. Consumer price inflation has increased to its highest rate in several years in a number of economies, though central banks still generally expect inflation to return to levels consistent with their targets next year. Market-implied inflation expectations and private sector inflation forecasts have risen, but for the longer term they are in line with central banks' targets.

Source: BIMB Securities Research - 14 Dec 2021