Global Economic Outlook: That '70s Show

The world is experiencing immense disruption to supplies of commodities. Prices of essentials from food to consumer goods have risen to multi-year highs, putting pressure on household wallets and corporate profits. In their efforts to tame inflation, hawkish central banks are willing to risk recession.

If this storyline sounds familiar, it’s because we’ve seen the movie before…more than four decades ago. The risk of repeating the stagflation of the 1970s is more real than ever, particularly for Europe. But we think the major markets can avoid this fate.

Here are perspectives on how major economies are poised to perform this year and next.

United States

  • Economic growth likely slowed in the first quarter, hindered by COVID-19 infections at the start of the year. But with restrictions eased and offices reopened, the second quarter is poised to witness buoyant consumer spending despite elevated prices. What distinguishes the United States from some other markets is the degree of pent-up demand and unspent pandemic stimulus. These tailwinds should allow growth to continue, even amid policy normalization.
  • Prices remain a headache for consumers, businesses and policymakers. Inflation climbed 8.5% in March from a year before, led by increases in food and energy costs. The deflator on core personal consumption expenditures grew 5.4% in February, far ahead of the Fed’s 2% target, affirming the case for rapid hikes. We expect the Fed to hike interest rates by 50 basis points in May. Tightening will continue through the first quarter of 2023, leading to a terminal rate range of 2.50-2.75%.