Low growth, slowing inflation: The global economy Boric will face this year

President-elect Gabriel Boric will receive a complex local economic outlook when he arrives in La Moneda in March. Gross Domestic Product (GDP) is expected to grow by only between 1.5% and 2.5% and inflation is expected to fall to 3.7%, according to the Central Bank, amid a tight fiscal picture.

Outside the country’s borders, the scenario won’t be easy either. Global growth will slow from 5.6% this year to 4.5%, according to the OECD, but with wide disparities between countries.

Inflation would have reached its peak by the end of 2021 or would do so in these months, to moderate gradually. Among OECD countries, the CPI would remain above 4% in 2022, as published in December.

Capital Economics warns that, while headline inflation will fall “sharply” this coming year, core CPI – which excludes volatile energy and food prices – will remain higher than most anticipate in several nations. This would imply that central banks will tighten policy this year, but in some markets at a slower pace than the market expects.

The consultant recalls that the evolution of the pandemic will be the “most important driver” of what happens to the economy and the market. It assumes that contagions will continue to “flow” and governments will respond to new variants, although it is assumed that the impact would be less than in the early stages of the pandemic. All in all, the firm anticipates that “2022 will be a year in which economic growth will disappoint”.

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Looking ahead to this year, JP Morgan foresees disparate scenarios for Chile’s main trading partners: while the U.S. would grow 3% each semester, China’s GDP would rise 6% in the first half of the year and 5.5% in the second half.

The investment bank defines 2021 as “one of the hottest years for inflation in decades”, which meant that all year long the spotlight was on the Federal Reserve, something that will continue in 2022. In December the Fed announced it would accelerate the tapering of its bond-buying plan, with the withdrawal expected to end in March.

It also anticipated three interest rate hikes – anchored between zero and 0.25% from March 2020 – something the world’s central banks will be watching closely.

Capital Economics expects US demand to remain strong this year, but that supply constraints will be “a firmer drag on output than most anticipate”.

The OECD warns that uneven vaccination implies that Covid-19 outbreaks is a risk that could delay the “full normalization of activity.”

The way China is reacting to the expansion of new variants is also viewed with concern. Capital Economics sees that the “zero Covid” strategies implemented by countries like the Asian giant will lead to a “more volatile” trajectory.

The market consensus is that China will grow over 5% this year, but Bank of America (BofA) is cautious about this projection. It warns that the “hurdle” of keeping growth above 5% this year is “quite high” and, in fact, forecasts a 4% rise in GDP.

The bank warns of “strong headwinds” of the rebound in domestic demand, hand in hand with a “very weak” momentum of investment and a slow expansion of credit.

Added to this, according to Wang Wentao, China’s commerce minister, it will be difficult for the country to keep its trade growth stable during the year ahead, as the conditions that boosted shipments in 2021 would not be sustained.

Injection of reinforcement

JP Morgan expects Latin America to rebound 1.6% in the first half of the year and only 1% in the second half. Goldman Sachs expects a 2% rise for the year, but says the region’s growth needs a “booster shot”.

This “modest” balance would respond to “rapidly” diminishing marginal returns from the reopening, high inflation that would moderate gradually but remain above target all year, tightening fiscal and monetary policies, a “softer” external impulse and greater political uncertainty, which would weigh on spending decisions.

This outlook posits Alberto Ramos, the bank’s chief economist for Latin America, in a recent report, in which he noted that GDP should benefit from pent-up private spending and the “rebuilding of business inventory.”

“While the recovery from the pandemic is still somewhat incomplete and uneven – there is still room to grow – Latin America looks set to return in 2022 to the low or modest growth path it was on before the pandemic,” Ramos warns.