A More Challenging Consensus

The latest June survey of Blue Chip professional forecasters is an uncomfortable read. Further downward revisions to growth expectations for 2022 have been accompanied by further upward revisions to inflation forecasts. That’s an unpleasant combination, suggesting stagflation risks are high and rising. That many policymakers moreover are now more actively engineering a tighter monetary policy in order to check inflation leaves global growth forecasts subject to further downward revision. The still-large - and growing - disconnect between forecasts for consumer spending growth and real household income growth in the meantime offers a stark reminder that the growth portion of the stagflation equation are subject to intense downward pressure at present. In other words, global recession risks are rising sharply.

These conclusions are reinforced in the charts below.

The evolution of consensus GDP growth forecasts for 2022 is shown in figure 1 below. These have been revised sharply lower over the last several months and most notably in large economies such as China, the US and the Euro Area. Their synchronized nature moreover hints that these revisions can be traced to global, not domestic, factors.

Figure 1: The evolution of Blue Chip forecasts for GDP growth in 2022

Specifically, supply-side shocks from the war in Ukraine, China’s zero-COVID policy and lingering scars from the pandemic have caused a further spike in some commodity prices. Consensus forecasts for CPI inflation have accordingly continued to climb in recent months, as evidenced in figure 2 below.

Figure 2: The evolution of Blue Chip forecasts for CPI inflation in 2022

The path that inflation takes from here will arguably remain critical for how growth forecasts subsequently evolve as well. The biggest downward revisions to growth forecasts for 2022 over the last 6 months have typically been made to those economies where inflation forecasts have been lifted aggressively (see figure 3). The key for these economies now will be whether wage growth and a greater willingness to draw down savings can compensate for the erosion to purchasing power that higher inflation has invoked. The omens for the United States on that score do not look promising (see figure 4).

This narrative about the links between growth and inflation are admittedly not universal - several Asian economies – and China in particular – have not experienced as much inflation upside as many developed economies. Yet other factors – and COVID lockdowns in particular – have instead taken a heavy toll on economic activity and forced forecasters to revised down their growth expectations for this year as a result.

Figure 3: Shifts in consensus growth forecasts for 2022 can be partly explained by shifts in inflation forecasts

Figure 4: The evolution of Blue Chip forecasts for US consumption growth and real personal disposable income growth

Growth forecasts though are clearly not just hostage to how inflation (or COVID) evolves from here. The response from policymakers – and central banks in particular – will also be key. More hawkish communications from a number of central banks in recent weeks have caused a big re-assessment from financial markets (and economists) of the likely pace of monetary tightening from central banks in the coming months (see figure 5 below). And that, in turn, has tightened financial market conditions in ways that may further derail economic growth in the period ahead.

Figure 5: The evolution of Blue Chip forecasts for 3 month interest rates at the end of 2022

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.