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National Institute Global Economic Outlook, 2021, vol. Series B, issue 4 Autumn, 4-5

Abstract: The global growth story has evolved from bounce-back to slowdown, but inflation seems to be ever more virulent as the virus continues to crimp global economic activity and severe supply chain disruptions hold back the recovery. Our new forecast using NIESR's global macroeconometric model, NiGEM, incorporates higher inflation than we forecast three months ago, while our 2022 global growth picture is more downbeat than other major forecasters. Inflation overshooting targets is likely to prompt central banks to dial back monetary policy accommodation, but cautiously, especially where fiscal policy starts to take back some of the earlier extraordinary stimulus. We have reduced our forecast for global economic growth in 2021 slightly, to 5.8 per cent. The world economy will slow down further, with growth of 4.3 per cent in 2022 and 3.7 per cent in 2023. We see risks as currently skewed to the downside (figure 1). A preview of our forecast and the revisions since our Summer Global Economic Outlook are presented in table 1. We have downgraded our forecast for the US economy which is now projected to grow by 5.8 per cent this year, and 3.7 per cent next year. Supply constraints are affecting Euro Area growth prospects, particularly as economies most reliant on global supply chains, such as Germany, slow down. Even with this, Euro Area GDP growth is now forecast at 4.8 per cent this year - thanks to the expected rebound in some large economies such as France, Spain, and Italy - and 4 per cent in 2022. There is a divergence in economic growth performance within emerging economies between fast-growing China and India, on the one hand, and other emerging economies, whose growth patterns are more exposed to cyclical demand swings in advanced economies, on the other hand. As the result of supply-side disruptions, we have revised world trade growth in 2021 from 9.5 per cent in our Summer Outlook to 8.3 per cent, and 7.6 per cent next year (from 9.3 per cent). Our OECD consumer price inflation forecast sees a sustained increase at 3.2 per cent until 2022, moderating to 2.6 per cent in 2023, and remaining above the rates seen before the pandemic (figure 2). How central banks will respond to inflation will have an impact on bond yields, with a combination of ending quantitative easing and higher policy rates. For now, we see no major tantrums. Higher long term interest rates and tighter monetary conditions in advanced economies pose a particular risk to emerging market economies such as Argentina, Brazil, Mexico and South Africa with high external debt and expected low growth, leaving those economies exposed to financial market stress should investors' risk appetite reverse. As we head towards a global interest-rate tightening cycle, we expect that debt concerns will mount. Globally, we forecast global government debt to stay at record highs - close to but below 100 per cent of GDP. Several countries are expected to remain with uncomfortably high debt burdens. The urge to get to a much wider level of vaccinations in many parts of the world, particularly low and low-middle income countries, continues to be an important priority to ensure global prosperity. The main downside risk to our central forecast is that the pace with which vaccinations are deployed, as well as the efficacy of current vaccines, may not prevent the spread of more infectious variants of the virus. We explore this in our risk scenario.

Date: 2021
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