Two possible scenarios for the world economy

The first half of last year saw one of the fastest periods of economic recovery on record. This solid acceleration was further supported by the release of savings, fiscal support from governments, looser monetary policies from central banks, and less aggressive socio-economic restrictions than those experienced during the first wave of contagion. However, the second half of the year was marked by cuts in growth forecasts, conditioned by the energy crisis and the associated logistical problems.

These challenges, however, are still present at the beginning of this year, according to the latest Economic and Sector Outlook report, prepared by MAPFRE Economic Research Department, which also adds the issue of the Omicron variant and its implications for the global economy.

Supply crisis

One of the issues facing most countries is bottlenecks. The dossier indicates that the crisis in supply chains and maritime transportation “may persist into the second half of 2022.” Along the same lines seems to be the semiconductor market which, "with delays in the manufacturing of automobiles, home appliances and electronic devices with extensive interconnection to other sectors", could postpone the return to normality until 2023.

This situation is occurring at a time when the price of energy and raw materials continues to rise. Experts point to the sudden increase in demand derived from the economic reactivation as the main factor, although there are others that come into play, such as:

• the rise in gas prices, due to increased demand, low stock levels and geostrategic dynamics between Russia, the United States and the European Union,
• OPEC's decision not to increase oil production and to impose investment resistance, which has driven up the price of oil in recent months,
• and the cost of electricity, which has skyrocketed due to low production levels in some clean energies (especially wind and hydro), and to price increases in CO2, gas and coal emission rights.

In the wake of the economic recovery, the strength of demand channeled to consumer goods continues to exacerbate bottlenecks. Why is this? The experts point out that this is a consequence of "the release of accumulated savings and the impulse of economic policies," although they add more recent issues such as the anticipation of consumption decisions in the face of possible future price increases, the awareness of current supply problems and the existence of certain fears surrounding the perception of scarcity.

However, the report does not foresee that these factors will continue over time: even though they may entail a reduction on the supply side in the short term, the forecasts point to a reduction in consumption throughout this year. In fact, energy and other commodity prices are expected to fall again once supply problems are resolved and demand normalizes, and therefore inflation, which has been rising historically for several months, begins to slow.

The two scenarios foreseen by MAPFRE Economics

Despite the risks of growing inflation and diminishing activity, the recovery will continue in the coming year, albeit at a slower pace and with divergences between developed and emerging economies and with differences within each of these groups. This is a result of both inherent vulnerabilities and structural factors such as energy dependence, interconnectedness with global supply chains and the economic importance of the services sector.

More positively, economic growth could surprise on the upside if energy costs were to fall rapidly, inflation were to ease, supply chain problems could be solved quickly and consumers began to shift spending towards still-depressed areas of the service sector.

Considering this overall backdrop, and in line with previous reports, a forecast corridor is presented based on two scenarios: a baseline scenario and a stressed (or alternative) scenario:

In the first (the baseline scenario), the economic impact is limited, although restrictions are resumed and normalization is delayed, accumulated experience leads to selective and less economically damaging measures, in line with the lesser impacts observed in the succession of variants of the virus, while hospitalizations do not result in a net increase compared to previous waves and the effectiveness of current vaccines endures or they are quickly adapted.

Meanwhile, in the second scenario (stressed scenario), the impact on levels of economic activity is greater, since, even if the severity of early-pandemic restrictions is not reached, it turns out to be a substantially worse scenario due to ineffective vaccines, saturation of health systems (owing to severity or transmissibility) and because infection rates force the reimposition of more severe and prolonged measures that do have an impact on activity.

Thus, the central outlook (base scenario) of the report envisages that, after growth in 2021 estimated at 5.8%, “the world will grow by around 4.8% in 2022 and 3.6% in 2023, with growth in emerging markets slightly below and slightly above in the case of developed markets.” This scenario gives the major powers the leading role in closing the output gap over the next few years, as they will contribute two thirds needed output. This is significant for considering what monetary policy will be implemented this year.

On the other hand, the stressed scenario analyzed by Economic Research assumes a later return to normality, with pandemic shocks that would continue until well into 2023, although involving gradually less harmful economic measures. “The impact of the supply chains becomes more adverse, with disruptions affecting a wider range of goods and services and driving inflation until the end of 2022,” adds the report. Thus, the forecast in this scenario would be for the world economy to grow by only 4.0% in 2022 and 2.6% in 2023.

In both scenarios, monetary policy in developed economies will show the first signs of tightening in 2022 and 2023, “maintaining the gradual pace of normalization to sustain governments' funding needs and avoiding a premature tightening bias aimed at taming inflation.” Furthermore, given the implicitly monetized fiscal effort and stressed inflation expectations, fiscal policy would follow in the footsteps of monetary policy, providing more intermittent and less impactful measures.