EXECUTIVE SUMMARY

• Global growth should remain robust but uneven, with rising divergence between advanced and emerging market economies. We expect omicron-related uncertainty to shave off (only) up to -0.3pp of GDP growth in advanced economies in Q1, due to increase disruptions in terms of labor and global trade. However, just like in the eponymous movie, whose title we borrowed for this report, current growth dynamics might keep us from looking up during the current phase of the recovery. Advanced economies will continue to drive more than half of global GDP growth (+2.2pp in 2022 and +1.6pp in 2023) while emerging markets lag — for the first time since the global financial crisis (GFC). Our 2022 GDP forecast remains broadly unchanged, with the Eurozone and the US expected to grow by +4.1% and +3.9%, respectively, while growth in China slows to +5.2% due to ongoing disruptions in the real estate sector and the government’s focus on financial stability. China’s lowest contribution to global GDP growth since 2015 is likely to have negative spillover effects on emerging markets whose recovery will be shallower compared to past crises.
• Global trade is expanding once again above the long-term average but will be disrupted by labor and supply chain bottlenecks, amplified by omicron. We expect global trade in volume to grow by +5.4% in 2022 and +4.0% in 2023. In the short run, the omicron outbreaks will keep disruptions and cost pressures high. During the next two to four months, we expect some lost value added in hard-hit sectors with low (or no) telework possibilities and higher supply chain driven-inflation due to production shortfalls in China to account for about one-third of elevated inflation at 1.5pp to 2.0pp in the Eurozone, the US and the UK. But we still expect a turning point during the second half of this year due to: (i) a cooling of consumer spending on durable goods, given their longer replacement cycles and the shift towards sustainable consumption behaviors; (ii) lower input shortages as inventories return to (or even exceed) pre-crisis levels in most sectors and (iii) shorter delivery times as higher capacity eases shipping constraints.
• We continue to expect pervasive supply-demand imbalances to keep inflation high until the end of the first half of 2022 in both advanced and emerging markets. Inflation is likely to decelerate this year as the recovery becomes entrenched, mainly reflecting the phase-out of transitory factors, fading catch-up effects of goods demand and declining energy prices during the second half of the year. Amid continued uncertainty about the scale and duration of inflationary pressures, central banks are shifting towards a more hawkish monetary stance to prevent inflation from becoming embedded in expectations. We have identified 10 emerging countries that are most at risk from a faster-than-expected US monetary tightening given their elevated liquidity risk and cyclical weaknesses: Argentina, Brazil, Chile, Egypt, Hungary, Nigeria, Romania, South Africa, Turkey, and Ukraine. The fiscal impulse in Europe will be stronger than in the US this year but diminish quickly as most countries start consolidating. Most emerging market countries are reducing budget deficits and re-building fiscal space, but commodity exporters remain vulnerable to slowing external demand from China.
• Gradually rising rates will continue to provide a benign but increasingly fragile capital market environment. Unchanged or even lower risk premia, declining real interest rates and excess savings have supported favorable financing conditions and helped risky assets outperform while fixed income assets have struggled amid rising inflation expectations. However, the positive risk sentiment underpinning historically high valuations in equity markets comes with rising market volatility and remains dependent on the continued growth momentum and the gradual removal of crisis-related policy measures.
• What could go wrong? Despite the emergence of yet another Covid-19 mutation, the economic impact of the pandemic is generally weakening. We estimate that potential disruptions to labor markets due to sanitary restrictions could put 2-3% of the value added at risk in advanced economies. In addition, tighter financial conditions or a premature withdrawal of policy support could undermine the recovery and increase private and public sector vulnerabilities, with the potential for cliff-edge effects in some countries. Greater divergence of fiscal and monetary policy normalization across countries could further increase imbalances and disrupt the recovery of international trade. As the gap between monetary and fiscal policy stances in Europe and the US is bound to widen, there is a rising risk of decoupling, which could feed into capital market dislocations. The spillover effects of higher capital outflows and FX volatility as the US begins to tighten financing conditions, the (largely) self-inflicted currency crisis in Turkey and rising uncertainty about the implications of slowing external demand from China could weigh on the outlook for emerging markets.