Macro forecasts: charts and commentary

US

We continue to expect growth in 2022 to be well above trend, at around 3.7 per cent, but have marked down our expectations somewhat to reflect the combination of higher oil prices acting as a drag on consumer spending, less fiscal spending than previously expected and a faster pace of monetary policy normalisation feeding through to the housing sector and consumer demand.

Growth is expected to slow further in 2023 to around two per cent.

More striking, however, we expect inflation to fall back more slowly, ending the year around 5 per cent, before easing further through 2023 to around 3 per cent. However, there is an unusual amount of uncertainty around those projections, with the balance of risks tilted to the upside in the near term.

We expect the Federal Reserve to raise rates to around 3.5 per cent by mid-2023, reflecting the need for them to deliver positive real rates over the forecast horizon.

Figure 1. US

Euro zone

At the start of the year the main concern about European prospects was the potential for the Omicron variant – and reactions to it – to have an adverse effect on growth. In the event such fears dissipated quickly but were replaced by an altogether more alarming threat of war in Ukraine.

How that is resolved is the great unknown, but already the conflict is having a major impact in many spheres. Any hit to growth is likely to be concentrated in Europe because of closer trade links and greater dependence on Russian energy.

The scale of possible interruption to growth is impossible to assess, but we project a brief hiatus followed by a stronger recovery. Meanwhile, the war has exacerbated the inflation shock and may prolong supply side disruptions.

This combination makes the ECB’s task very difficult. We assume that they will stop asset purchases as scheduled this year, but may find it difficult to raise policy rates as quickly as financial markets project.

Figure 2. Euro zone

UK

There is still a reasonable amount of growth catch-up to take place as, we hope, the COVID pandemic fades into history. The war in Ukraine has the capacity to upset the immediate growth and inflation outlook but should have no lasting impact other than to reduce trade links with Russia and to re-think energy supply.

The inflation impulse should fade later in the year and in 2023 but its impact is being felt now.

Recently announced fiscal assistance will help offset some of the burden from spiralling energy prices and high inflation more generally, but will not be enough to prevent the largest real income squeeze on UK households since the 1950s.

The Bank of England has raised rates to counter the inflation threat and, they hope, to help prevent more damaging second round effects. As the dust settles from COVID and events in Ukraine, the post-Brexit reality of slower-growth Britain may become more apparent.

Figure 3. UK

China

Ahead of the 20th Party Congress in October, China’s policymakers are now focused on growth, cushioning the property market downturn, expanding infrastructure, and bringing to a close the damaging regulatory attacks on ‘bad’ activities and disorderly expansion of capital and powerful internet platforms.

Exports and fixed asset investment in manufacturing are solid, but property development and private sector confidence remain weak. Authorities are loosening zero-COVID policy, and though disruptions and restrictions will continue to occur, the imminent arrival of mRNA vaccines and Omicron’s less dangerous nature should continue the move away from strict containment, which has turned an initial health victory into a liability.

China’s increasing economic cooperation with Russia, and President Xi’s pledge of support with “no limits” creates a renewed danger of sanctions and if not full decoupling, then increased financial and economic fragmentation between China and other countries that were already looking to diversify supply chains. Despite Fed hikes, China’s slowdown and leverage problems suggest slow rate cuts will continue.

Figure 4. China

Japan

Omicron’s spread and low booster rates instigated a “quasi state of emergency” across large parts of Japan, damaging confidence and early-2022 growth. Those curbs are ending, but weak demand (including government spending) was revealed in downwardly revised Q4 data, just as new headwinds from high energy prices emerge.

We anticipate a modest rebound in coming quarters, but have revised down the GDP path, and maintain that growth will fall to sub-1 per cent unless fiscal stimulus and a weak yen combine with accelerated reforms.

The BoJ will ignore two per cent inflation caused by oil prices and a weak yen, as these are temporary adjustments and not a reason to raise rates – slowing export growth, worse terms of trade, and fast-widening rate differentials as other central banks rev up hiking make the yen ripe for further depreciation.

There will be hard decisions on geopolitics that affect the economy: how to deal with the Sakhalin oil/gas development in Russia, and whether to follow Germany’s lead in rearming for defence purposes, which may require constitutional change to Article 9 and would have consequential fiscal impact.

Figure 5. Japan

Canada

Extraordinary policy stimulus will continue to be removed in 2022 as the economy recovers further. New COVID variants present a risk to the outlook and may delay normalisation.

Growth in the service sector remains strong while the goods market continues to be impacted by COVID-related supply issues. Predicting the level of maximum sustainable employment and the relationship between labour market conditions and inflation are two key questions for the central bank.

Anticipating the persistence of inflation pressures will be fundamental in determining the pace and terminal rate for monetary policy tightening. The extension of COVID-related inflation pressures against potential drags to growth from prolonged COVID mitigation policy will be a difficult balancing act for central banks. However, the BoC is expected to begin raising rates in mid-2022.

Figure 6. Canada