Global Macroeconomic Outlook

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Global Economy: Inflation continues to weigh on growth 

U.S. Growth to Moderate

After expanding 5.7% in 2021, the fastest pace since 1984, the U.S. economy likely will grow in 2022 but at a slower rate. While consumer demand should remain strong, other factors may prove more challenging. These include supply chain disruptions, labor shortages, elevated inflation and Fed tightening. Nevertheless, we still expect the economy to exhibit healthy growth in 2022.

Stagflation Emerges as a Risk for Europe

The eurozone economy grew at a record 5.2% in 2021, even as industrial sector weakness hampered Germany’s economy. While we expect the eurozone to continue expanding in 2022, we believe the pace will be notably slower. We are carefully monitoring the Russia/ Ukraine conflict and its impact on European energy costs. Higher energy prices may threaten Europe’s growth outlook and trigger higher inflation. Accordingly, we believe stagflation is a risk for Europe this year.

COVID, Real Estate Sector Muddy China’s Outlook

China’s growth rate should continue to slow in 2022. The nation’s zero-tolerance COVID policy remains a drag on domestic consumption. Additionally, the government’s ongoing crackdown on real estate developers continues to weigh on growth. However, we expect the People’s Bank of China, the nation’s central bank, to deliver accommodative policy action to help stabilize China’s economy.

For emerging markets (EM) countries overall, growth forecasts remain solid, but growth likely will decline from 2021’s rates. Major economies, particularly in Latin America, are experiencing larger-than-expected slowdowns.


Inflation: Prices slow to ease

Rising Shelter Costs to Keep Inflation Elevated

While the annual inflation rate may be nearing a peak, we don’t expect a quick reversal in recent price hikes. We expect shelter costs, which represent nearly one-third of the Consumer Price Index, to continue to climb. This, combined with the ongoing effects of supply chain disruptions and rising commodity prices, should keep the overall inflation rate elevated. Eventually, as widespread supply/demand imbalances improve, we expect annualized core inflation to settle at 2.5% to 3.0%—still notably higher than in recent years.

Europe Faces Record-High Price Gains 

Surging energy costs recently drove inflation to a record high in Europe and a 30-year high in the U.K. Base effects from last year’s  shutdowns and growing consumer demand for goods and services also are driving prices higher. While central bankers in Europe expect inflation to ease in 2022, U.K. policymakers are not as optimistic. Among the major central banks, the Bank of England was the first to raise rates. 

Emerging Markets Inflation Remains Mixed 

While most of the world copes with decades-high inflation, some EM countries are seeing only modest pricing pressures. For example, inflation in China has steadily dropped and remains sharply lower than inflation in developed markets. Meanwhile, inflation continues to soar in Argentina, Turkey and Brazil, where double-digit inflation rates linger. Rising energy prices, monetary policy and currency devaluations have contributed to these extraordinary inflation rates.


Monetary Policy: Central banks rein in support

Fed Sets Sights on Soaring Inflation

With inflation sitting at a 40-year high and growth likely to slow, the Fed faces a complicated task. Policymakers may have to hike their short-term rate target at a faster-than-usual pace while reducing the Fed’s balance sheet. However, if the Fed moves too aggressively, it risks stalling economic growth.

We expect the Fed’s tightening cycle to unfold with a series of measured rate hikes followed by balance sheet management. In implementing its strategy, the Fed will assess inflation levels and the economic effects of Russian sanctions.  

Europe Focuses on Reducing Bond Buys

Despite rising inflation, the European Central Bank is holding interest rates at 0%, at least for now. Policymakers believe inflation should ease, and they remain focused on reducing their bond purchases.

Meanwhile, the Bank of England expects inflation to continue climbing into spring and has launched a rate-hike campaign to retaliate. Borrowing rates are at their highest level in two years. Policymakers also are tapering their bond purchases.

China Seeks Supportive Measures

Unlike its developed markets peers, the People’s Bank of China likely will ease monetary policy to spark growth. Policymakers want to increase support for key areas of the economy, and the low-inflation backdrop provides room for the central bank to ease policy.

Outside China, most EM central banks have been aggressive in hiking rates to combat inflation. We believe this tightening cycle will conclude soon.


Interest Rates: Rates heading upward

U.S. Rates to Climb Modestly Higher

We believe steady economic growth combined with elevated inflation and continued supply/demand imbalances will push Treasury yields higher. We expect the benchmark 10-year Treasury yield to settle in a range of approximately 2.0% to 2.5%.

In the short term, we expect the yield curve to remain relatively flat, as investors price in central bank policy errors. It now appears the Fed waited too long to tighten policy. High and persistent inflation likely will force the Fed to raise rates faster than policymakers— and investors—would prefer.

Geopolitics to Keep European Yields Low

With the Russia/Ukraine conflict pressuring European growth, we believe government bond yields in Europe should remain notably lower than their U.S. counterparts. Meanwhile, U.K. rates are rising modestly due to inflationary pressures, and rates in Japan remain unusually low. 

Rates Remain Higher in Emerging Markets

EM local rates remain structurally higher than developed markets rates. However, the real interest rate differential favors emerging markets, given the soaring inflation rates in the U.S. and Europe.

Many EM central banks have been raising rates, including in Mexico and Brazil. These rate hikes reflect the need for countries to control inflation to prevent a currency devaluation. This should offer some support to EM currencies in addition to the potential for yield pickup from local rates.


Q2 2022 Investment Outlook Resources

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