Developed economies will dip significantly lower than markets are anticipating over the next 12 months, according to Azad Zangana, senior European economist & strategist at Schroders.
The US, UK and eurozone economies are all likely to fall into a recession within a year, with Zangana stating: “These markets will experience significant declines in output over the course of the next year, and the outlook for the global economy is grim.”
As a result, Schroders reduced its global economy growth forecasts this year from 5.9% down to 2.6% and expects this to slow further in 2023 to 1.5%.
This would make 2022 the worst year for the global economy since 2009, apart from the peak of the pandemic.
In the US, the firm slashed its economic growth estimates to 1.7% for 2022, significantly lower than market forecast of 2.1% growth.
Next year, however, Zangana estimates that the US economy will drop 1.1% by the end of 2023, a stark contrast from the market’s expectation for 1% growth.
Zangana said that higher interest rates, less generous government spending and higher inflation will eventually bring the rate of inflation down, but the US economy will have to contract by 1.9% before returning to growth.
He added: “Policy tightening is expected to be severe enough to drive the unemployment rate higher, which is required to see not only household demand fall, but also inflation pressures ease.”
The US’s inflationary problems are domestically generated and can be resolved through policy changes, but Europe is mostly being impacted by external factors.
Most notably, Europe’s reliance on Russian oil and gas will continue causing spiralling energy costs throughout the region and create a contraction in economic growth – of the 7.8 million oil barrels exported from Russia every day, more than half (4.5 million) go to Europe while just 626,000 arrive in the US.
Although the UK economy has displayed some resilience over the short term, Europe’s energy crisis is likely to have a knock-on effect domestically too.
Zangana said: “The UK is forced to endure high European energy prices, which are going to hit households with a lag due to the government’s energy price cap.”
Central banks around the globe have taken drastic action to combat rising costs as inflationary pressures appear more ingrained than initially anticipated.
The Federal Reserve (Fed), who’s monetary policy arguably has the biggest impact on global markets, has raised interest rates five-fold in the space of three months after it brought rates up to between 2.25%–2.50% in July.
Likewise, the European Central bank (ECB) broke its eight-year streak of negative interest rates last month when it hiked rates by 50 basis points.
As recession seems ever more likely, Zangana said that central banks’ pivot from normality “feels like the dawn of new regime in monetary policy and financial markets”.
“The era of zero or even negative interest rates is over,” he added. “A definitive regime shift has occurred, taking us into a new era.”