Global Economic Outlook: Touch And Go

United States

• The Omicron wave has had a visible effect on confidence, sales, and production, which could lead to softer first quarter gross domestic product growth. But the strong labor market recovery has been a highpoint of the economy. The unemployment rate fell to 3.9% in December, a startling improvement of two percentage points in just six months. Combined with upward revisions to payrolls, the economy is closer to full employment than initially understood, giving further urgency for the Fed to act.
• Inflation remains elevated, at 7.0% over the past 12 months. Price increases were broad-based, and pandemic-affected sectors like travel and automobiles continue to show high readings. While we expect inflation to cool, lower readings will not come soon enough for the Fed to stand pat. An initial rate hike is likely in March, with two more to follow later this year.

Eurozone

• The eurozone ended the year on a relatively sour note, with the emergence of the Omicron variant dampening consumer confidence and hindering activity. Manufacturers reported a moderation of demand. However, on a positive note, Purchasing Managers’ Indices (PMI) are showing that supply bottlenecks are finally starting to ease, with input prices moderating.
• Despite the surge in infections and some new restrictions, we are hopeful that the European economy will weather the current disruptions underpinned by lasting policy support, both monetary and economic (including extension of furlough schemes in member states). Inflation hit a new record high of 5.0% year-over-year in December, but there are signs that the peak is near. While the European Central Bank revamped its asset purchase plans at its December meeting, policy rates are likely to remain unchanged.

United Kingdom

• The U.K. pushed to keep its economy open and growing throughout 2021, but the latest wave of infections hindered results. December saw a sharp fall in service activity and a deterioration in social spending. But the macro picture is not entirely gloomy. Cases have fallen sharply in the country, validating the decision to keep the economy open. Manufacturing bottlenecks eased at the close of 2021. The latest labor market report reinforced the view that the withdrawal of the furlough scheme didn’t take any wind out of the job market.
• Rising costs of living, apart from Brexit, are emerging as a major headache for the government. Elevated inflation prompted the Bank of England to hike its interest rates by 15 basis points at its December meeting. With inflation likely to continue to rise in the first half, we expect the central bank to continue to tighten monetary policy, taking the policy rate to 1.0% by year-end.

Japan

• The Japanese economy likely posted a robust recovery in the fourth quarter of 2021. But the country has seen a sharp rise in Omicron cases recently, leading to tighter restrictions. This will weigh on domestic consumption in the first quarter. The release of pent-up demand and the ongoing recovery in exports should lead to a rebound in growth in the balance of the year.
• Uniquely, Japan has been less impacted by consumer inflation, despite producer prices surging to a four-decade high. Lack of pricing power is a key factor behind firms not being able to pass on higher costs to consumers. As a result, the Bank of Japan (BoJ) maintained the status quo across all policy parameters at this month’s meeting. However, a weaker yen and higher commodity prices did lead to an upward revision of the BoJ’s inflation forecasts.

China

• Growth continued to decelerate in China from double digits in the first half of 2021 to 4.9% year-over-year in the third quarter and 4.0% in the last quarter of 2021. The Chinese economy had benefitted from strong demand for goods during the earlier waves of the pandemic. However, its zero-COVID policy is now putting the economy at a disadvantage relative to other markets. Sluggish consumption amid virus-related uncertainty, supply bottlenecks, and the property downturn have weighed on the Chinese economy. These factors will continue to resonate in 2022, but the risks around Evergrande and other developers will likely be ring-fenced.
• The slowdown has caused a shift in policy tone and stance with emphasis being given to stabilizing growth. The People’s Bank of China, earlier this month, cut policy rates by 10bps and pledged to “open its monetary policy toolbox wider”, implying more easing is on the way. Fiscal measures in the form of infrastructure spending and tax cuts are also likely.

© Northern Trust

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