Advanced economies face a tightrope walk to avoid a recession, but strong household and corporate balance sheets and tight labour markets for now imply sufficient sources of resilience. Further upside inflation surprises could tip the global economy into a recession, however.
Recession more likely but not our baseline (yet)
Despite the economic slowdown, in our baseline scenario we still expect that a global recession will be avoided, as we assume that the current supply constraints (and thus inflation) will gradually fade, allowing central banks to increasingly focus on supporting economic activity. In this baseline, we project global economic growth to be 2.8% in 2022 and 2.8% in 2023.
Q3 2022 Advanced Economies Outlook
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In our negative scenario, supply shocks intensify into a perfect storm, resulting in further upside inflation surprises which would force central banks to be more aggressive. In our positive scenario, which we deem least likely, the supply constraints would fade quickly, allowing central banks to take their foot of the brake.
From underweight to neutral in equities
Equity market corrections have made valuations fall back to their long-run averages. At the same time, we may well have approached peak central bank hawkishness. Additionally, investor sentiment seems to have bottomed out for now. Combined, this leads to a change in our equity allocation from underweight to neutral. With respect to eurozone bonds, we maintain our neutral position, to balance the reality of slowing growth due to the war in Ukraine and the threat of further upside inflation surprises with our call that the ECB seems committed to prevent any significant further rise in the borrowing costs for governments.
Longer-term perspective needed to prevent further SDG stagnation
Households and businesses across advanced economies are facing increasingly difficult situations in all three of our scenarios. As we do not expect wage growth to keep track with inflation until late 2022 in each of the scenarios, household purchasing power will continue to decrease. This especially impacts lower-income households, who spend a larger proportion of their total income on food and energy. Likewise, businesses face cooling demand and possibly energy shortages.
Short-term solutions for these problems may well ease the immediate pain for most households, but they directly oppose those SDGs for which progress was already stagnating last year and are the major challenges for high income countries: climate change, biodiversity loss, and inequality. Targeted measures are needed that simultaneously address inequality, climate change, and biodiversity loss. Setting and sticking to ambitious domestic targets therefore remains crucial. Advanced economies are also obliged to pursue close global cooperation, as they generate the most significant socioeconomic and environment impacts outside their borders, thereby hampering other countries to achieve the SDGs. It is of the utmost importance that policymakers do not forget the main SDG challenges while they try to deal with the near-term economic turmoil.