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In Q2 2021, the global economy began to exceed pre-pandemic GDP levels from Q4 2019. The Asia-Pacific region completed its recovery by the end of 2020, while the United States peaked in May 2021. Africa and the Middle East are expected to follow in the third quarter, with Europe and Latin America completing recovery in the fourth quarter.
Global real GDP is expected to grow 6% in 2021 after contracting 3.5% in 2020, representing the strongest growth since 1973. Growth is expected to continue at a 4.6% pace in 2022, then stabilize between 3% and 2025. As vaccination rates increase, pandemic-related restrictions are lifted, and consumer spending surges, the global economy is entering the "sweet spot" of the current expansion—particularly in the United States due to demand for services related to travel and social interaction. Western Europe is in the early stages of rapid growth as economies reopen, labor market conditions improve, and household savings rates fall from abnormally high levels.
Business investment is also recovering due to stronger sales prospects and favorable financing conditions, with commodity exporters benefiting from rising prices and strong export recovery.
The withdrawal of fiscal stimulus as governments control spending and address higher debt burdens will slow economic growth. Government fiscal deficits expanded from 3% of world GDP in 2019 to 10% in 2020, and are expected to shrink to 7% and 4% respectively in 2021 and 2022.
COVID-19 remains a risk to economic prospects in regions with lagging vaccination rates, including emerging and developing countries where vaccination campaigns have just begun and will continue into 2022. Parts of Asia experienced COVID-19 outbreaks in spring, leading to affected lockdowns affecting consumer spending and exports. India, Taiwan, Malaysia, Vietnam, and Japan have all experienced setbacks in recent months, but should rebound as India's daily infection rate has declined 80% from its peak in early May.
Rebalancing of severely disrupted global supply chains will take time
According to the IHS Markit PMI™ global manufacturing survey, supplier delivery times in May were the longest in the survey's history, resulting in the largest increase in input costs in over a decade and record inflation in sales prices. While some delays originated from Asian suppliers, manufacturers in Europe and North America were most affected by delivery delays. Transportation delays may persist into 2022 as consumer demand is expected to grow rapidly through 2021. Semiconductor shortages have also disrupted several industrial sectors, including automotive and parts, household goods, and technology equipment.
Industrial commodity prices have started to retreat, but downstream price pressures remain significant. High commodity prices are suppressing demand and stimulating production. The IHS Markit Material Price Index (MPI) has been declining from early May to mid-June, and the decline is widespread. Buyers are resisting high prices, and China has announced plans to sell state-owned industrial metal inventories. Despite the downturn, the MPI is up 25% year-to-date, nearly double the level of the same period last year. Some of the increases will be passed through to finished goods prices over the coming months.
As supply conditions improve and commodity prices fall, global consumer price inflation is expected to rise from 2.1% in 2020 to 3.3% in 2021, then return to 2.7% in 2022. Forecast risks are on the upside, depending on the path of long-term inflation expectations and monetary and fiscal policy.
As economies move toward full employment, temporary inflationary pressures may give way to more persistent inflationary pressures. Emerging market central banks in Brazil, Russia, Ukraine and others have raised interest rates in response to accelerating prices, currency depreciation, and capital flight. In the United States, the eurozone, and other developed economies with well-anchored inflation expectations, monetary tightening can be postponed in the short term, but not indefinitely.
