Shrutee Sarkar

BENGALURU, (Reuters) – The COVID-19 pandemic lingers and central banks are reducing their emergency stimuli too rapidly and causing further disruption to supply chains. This is according to economists surveyed by Reuters.

Global growth is likely to have peaked. Forecasters generally agree with many central bankers’ view that recent inflation surge will not last, even though they are making higher forecasts.

Although supply chain disruptions present a significant threat to the recovery, and there has been no sign of sudden easing so far, stock markets still trade at record levels even as interest rates rise.

The concern is after an extended period of record low rates and emergency policy that central bankers https://www.reuters.com/business/fed-faces-showdown-supply-demand-patience-collide-2021-10-27 may get impatient and feel compelled to respond to the current spike in inflation where people are now feeling the pinch. [ECILT/US]

Reuters surveys of more than 500 economists worldwide found that thirteen of the 25 central banks raised interest rates by least one time before the year ends. Some have done it already, including the New Zealand, Russia, or Brazil central banks.

A quarter of 171 economists who answered an additional question stated that central banks slowing down stimulus was the greatest downside risk for the global economy.

The top two risks were identified by a similar percentage of respondents as supply chain disruptions and flare-ups due to the COVID-19 Pandemic. This pandemic is set for third year in 2022. It remains a significant but not eliminated threat.

“Many central banks are currently cautiously shifting towards the exit when they come to ultra-loose money policy. Jan Lambregts from Rabobank, who heads global economics research on markets and economics at Rabobank said that they aren’t doing so because of the economic recovery.

“Cost-push inflation appears to have set the wheels in motion for central banks, who claimed they have a wider socio-political emphasis. It could be very expensive for central banks to get this wrong in order to maintain their independence.

In fact, the global growth rate was set to fall to 4.5% next years from an alarming 5.9%, which is largely unchanged from July. That slowdown next year is a bit sharper than International Monetary Fund https://www.reuters.com/business/imf-cuts-global-growth-outlook-supply-bottlenecks-hobble-pandemic-recovery-2021-10-12’s latest projection of 4.9%.

The poll showed that growth would slow to about 3.5% by 2023.

“The initial burst in activity associated with reopening the markets is now over and the growth momentum is quickly losing pace. Janet Henry, the global chief economist of HSBC noted that while fiscal support may be playing a significant role, so is COVID-19’s direct effect on disruptions and restrictions.

“Despite all uncertainties, central banks wish to see the end of the era monetary policy that was extremely loose.”

The exit is the goal of most central banks. There are notable exceptions.

The Bank of England https://www.reuters.com/world/uk/bank-england-raise-rates-025-q1-possibly-sooner-2021-10-21, the Bank of Canada https://www.reuters.com/business/bank-canada-raise-rates-q3-next-year-possibly-sooner-2021-10-25 are expected to raise rates next year and the European Central Bank https://www.reuters.com/world/europe/ecb-raise-rates-2024-risk-remains-earlier-hike-2021-10-22 is predicted to hike in 2024, but the Bank of Japan https://www.reuters.com/world/asia-pacific/japans-q3-growth-forecast-trimmed-further-covid-19-drag-2021-10-15 is now forecast to do nothing with interest rates through the end of the forecast horizon.

MODEST INFLATION FORECASTS

Economists have raised the inflation outlooks of 18 of 21 industrialized countries by between 0.1 to 0.7 percentage points and of 15 emerging economies by between 1 and 1.8 percentage points.

Nearly two-thirds (117 out of 182) of the economists who answered an additional question said that the current surge in global inflation would not last for the next 2 years.

The 65 remaining respondents stated that inflation is likely to continue rising and more than 60% of them said it could impact global growth.

It is likely that the inflation rate will drop in all major economies next year. However, there are signs that inflation pressures are increasing,” stated Neil Shearing of Capital Economics.

Although I don’t believe that it’s a 1970s-style episode of inflation, if you examine all the indicators in the labor market and product market they point all to higher prices and an underlying rate inflation.

A graphic from Reuters Poll on Global Economic Growth Outlook:

https://fingfx.thomsonreuters.com/gfx/polling/lgpdwlbayvo/Reuters%20Poll%20-%20Global%20economic%20growth%20outlook.png

China, second in world economic growth, is expected to shrink to 5.5% in 2022 after an increase of 8.2% in 2018. Other major emerging markets economies are expected to experience difficulties this year as well. [ECILT/CN][ECILT/LTAM][ECILT/IN][ECILT/AFR]

While developing Asian countries (ex-China), have been most severely affected by the Delta variant of the disease, there have been some indications that they are starting to recover as more COVID-19 patients fall. Lloyd Chan, senior economist from Oxford Economics, said that the most vulnerable economies are still those with low vaccination rates.

(For more stories, see the Reuters Global Long-Term Economic Outlook Polls Package)