Growing pains of a post-COVID global economy

October 21, 2021

Steven Wieting

Chief Investment Strategist & Chief Economist

SUMMARY

The period of COVID disruptions and stimulus will give way to a “new normal,” with global GDP gains ongoing but decelerating. But overall, we expect growth to endure and supply shortages to diminish as consumer goods spending falls.

Global growth will likely exceed 5.5% in 2021 and fall below 4.0% in 2022. This is despite a broadening services expansion and a strong near-term outlook for goods production and trade driven by inventory rebuilding.

Monetary policy normalization points to a further growth slowdown in 2023, although no new recession is likely. China’s deliberate “multi-policy” tightening should yield its slowest growth rate in modern history aside from the initial COVID shock. After inducing a severe property slump, policymakers seem unlikely to reverse new regulatory restraints on housing. However, some temporary elements of the Chinese slowdown – such as energy supply constraints – should see relief. Broader policy easing is likely to improve China’s growth outlook for the second half of 2022 and beyond.

China’s slowdown to sub-4% growth near-term should spill over to other world regions. We have reduced our global equity weighting from 8% to 6% overweight, with cuts to Asia, Europe and some scaling back in the US, even as we see the US as the relative beneficiary of global capital inflows.

With energy costs now accounting for the largest share of the inflation spike, we see US CPI gains moderating to 3.0% in 2022 after a 4.5% rise in 2021, using yearly average data.

Our Global Investment Committee (GIC) has reduced its overweight to Global Equities from +8% to +6% and raised the Fixed Income and cash allocation from -8% to -6%. While we expect global equity returns in the high single-digits in our base case view over the year ahead, returns are moderating and certain global risks have increased.