Global Economic Outlook: Doom and Gloom

After a strong rebound from the pandemic in 2021, it’s been all downhill for the global economy this year. Economic activity is being hindered as policymakers cope with the hottest inflation in decades, impairments from the Ukraine war, and China’s prolonged lockdowns. Recession fears are starting to come true. The U.S. economy contracted in the first half of 2022; Europe is likely to post a similar performance in the second half. China is struggling to tame its property sector crisis and live with COVID-19.

Strong labor markets have been a blessing for most economies but are also proving to be a curse for major central banks in their fight against persistent inflationary pressures. Policy is trying to address a cost-of-living crisis by willingly inflicting a hit to growth. Recovery from this downturn and slowdown will be gradual, unlike the V-shaped pattern seen during the pandemic.

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

United States

  • Inflation remains hot in the U.S., with the consumer price index rising 8.2% year over year in September. The greater worry is the surge in core inflation to a four-decade high, led by services including shelter. Lower energy prices have been a rare bright spot in recent months, but that may not last for long. Elevated food prices aren’t helping, either.
  • With inflation high and the labor market still tight, the Fed is unlikely to change course. The September Summary of Economic Projections showed a median forecast of 125 basis points in hikes before year end. That is in line with our expectations. But the risks are clearly to the upside, if inflation readings remain elevated.