With some critical supply shortages and shipping bottlenecks persisting into 2022 and beyond, inflation pressures will subside only gradually, according to a new report from IHS Markit.
The report noted that IHS Markit manufacturing Purchasing Manager’s Index (PMI) data shows supplier delivery times lengthening to the greatest extent on record in October, leading to sharp accelerations in input costs and output prices. Input costs are being passed along to customers at unprecedented rates, suggesting little buyer resistance, the report said.
On the positive side, a broad price correction appears to be underway in commodity markets. The IHS Markit Materials Price Index fell 14 percent in the four weeks ended Nov. 11 and it stands 20 percent below its mid-May peak. Shipping rates and prices of lumber, ferrous metals and coal are retreating from exceptional highs. With normal lags, the declines in raw material prices should bring some relief to finished goods markets in the first half of 2022, IHS forecast.
“Global consumer price inflation is projected to pick up from 2.2 percent in 2020 to 3.7 percent in 2021, its highest rate since a 5 percent advance in 2008,” Sara Johnson, executive director of global economics at IHS Markit, said. “As agricultural and industrial commodity prices retreat, consumer price inflation will ease to 3.5 percent in 2022 and 2.7 percent in 2023 and 2024.”
IHS Markit said global economic expansion is unevenly progressing, varying across regions. World real gross domestic product (GDP) growth, adjusted for inflation, slowed to a 2.2 percent rate in the third quarter from a 4.6 percent annual rate in the second quarter, as outbreaks of the Covid Delta variant curtailed production in Asia Pacific and slowed consumer spending in the United States.
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Global growth should pick up to a 3.8 percent annual pace in the fourth quarter, IHS Markit said, as resilience in Asia Pacific and North America outweighs a pronounced slowdown in Europe, where Covid virus infections are now rising.
World real GDP is projected to increase 5.5 percent in 2021 and 4.2 percent in 2022. IHS Markit PMI surveys are signaling an acceleration in service sectors that should continue into 2022, along with further recovery in travel and tourism. Global growth will settle to 3.4 percent in 2023 and 3.2 percent in 2024 as pent-up demand is satisfied, employment recoveries are completed, and fiscal and monetary policies tighten, the report said.
“Global economic growth will continue, albeit at a moderating pace over the next three years,” Johnson said. “The Covid-19 virus remains a source of disruption for regional economies, but its economic impact will diminish with further progress on vaccinations and treatments. As supply conditions improve, downstream inflation rates will start to ease in the first half of 2022. A measured tightening of monetary policies will help to restrain inflation expectations and actual inflation.”
The U.S. economy is proving its resilience with robust gains in consumer spending and industrial production in the final quarter of 2021. However, high inflation is dampening consumer sentiment, but with little impact to date on spending behavior
That led IHS to project real GDP growth to 4.4 percent in the fourth quarter from an annual rate of 2 percent in the third quarter. Improving Covid trends, the partial resolutions of supply disruptions and labor shortages, and inventory restocking will support growth moving through 2022.
Among major economies, the U.S. business cycle most closely aligns with the global economy, the report noted. U.S. real GDP should increase 5.5 percent in 2021 and 4.3 percent in 2022. As the economy reaches full employment and interest rates rise, growth will settle to 2.9 percent in 2023.
After a mid-2021 growth spurt, Eurozone growth prospects are deteriorating, according to the report. With the easing of pandemic-related restrictions, eurozone real GDP surged at annual rates of over 8.0 percent in the second and third quarter, led by a rebound consumer spending. As 2021 ends, however, growth is slowing abruptly in response to record-high energy costs, supply chain disruptions and a new wave of Covid cases.
Eurozone real GDP should increase 5.1 percent in 2021, 3.7 percent in 2022 and 2.2 percent in 2023, IHS predicted.
Meanwhile, China’s economy is resuming a long-term deceleration. Real GDP grew to 4.9 percent in the third quarter and a further slowdown is expected in the fourth quarter, as the government’s deleveraging campaign deflates real estate and construction activity. Other headwinds include a declining working-age population, diminishing productivity growth as regulations increase and sourcing diversification by multinational companies. China’s real GDP growth is projected to slow from 8.1 percent in 2021 to 5.5 percent in 2022 and 2023.
Asia Pacific economies are rebounding from third-quarter setbacks as factories reopen. With the Delta variant wave of Covid subsiding, the report said manufacturing production in Asia Pacific is rebounding, led by accelerations in Indonesia, Thailand and India.
The regional recovery in manufacturing output is helping to gradually ease global supply-chain disruptions. Real GDP in Asia Pacific, excluding China and Japan, is projected to increase 4.5 percent in 2021 and 4.7 percent in 2022.