2022 Outlook: Growth despite inflation

Morgan Stanley Research

12/15/21

Summary: The surge in global inflation has investors fretting about future growth, but Morgan Stanley economists say price surges will subside, making way for 4.7% global GDP growth in 2022. Here’s the view on the global economy for 2022.

It's impossible to talk about the 2022 global economic outlook without addressing the elephant in the room: inflation. For decades, significant price growth eluded most major markets. Then, suddenly, a surge in demand coming out of the COVID-19 recession, coupled with lingering supply-chain disruptions and labor shortages, created a perfect storm for price increases.

Inflation for developed markets is on track to reach 4.7% at the end of this year1—not an insignificant number—and in a typical economic cycle, this would be a clear signal for central banks to raise rates and pump the brakes on growth. Then again, this cycle has been anything but typical. “Things are normalizing,” says Morgan Stanley's Chief Global Economist Seth Carpenter, “but they are not normal.”

While inflation dynamics will vary by country as supply chains and labor markets stabilize at different rates, the economics team at Morgan Stanley Research forecasts that inflation in major markets will “peak then retreat”.

Monetary policy is likely to tighten but less than investors fear, while strong capital expenditures, improving supply chains, and other forces add up to Morgan Stanley's above-consensus outlook of 4.7% GDP growth for 2022.

Here are some of the factors behind these numbers. 

Morgan Stanley real GDP forecasts (year/year)

A table displaying Morgan Stanley's real GDP forecasts.

Source: Bloomberg, Haver Analytics, IMF, Morgan Stanley Research forecasts; Note: Aggregates are PPP-weighted. Brazil consensus numbers taken from BCB market expectations survey; China consensus reflects a subset of peers.


Supply chain disruptions should dissipate

Globally, supply chain disruptions are a major driver of recent inflation, and based on surveys and feedback from the team’s equity analysts, Morgan Stanley Research believes we are now at, or close to, the worst level of supply chain disruption.

Strong global inflation now, but expected to recede next year

Line chart displaying CPI inflation.

Source: Haver Analytics, Morgan Stanley Research forecasts; Note: The global aggregate is a weighted average using PPP weights.


In the US, supply chains are on the verge of recovery and commodity price increases are also set to subside. The US economics team says a strong capex cycle, increased inventory-building, and deferred demand should drive GDP growth of 4.6% for 2022.

This isn’t to say all inflation is transitory. Prices for some categories in the US—including housing—are expected to continue rising to reflect normal cyclical dynamics.

Monetary tightening will be moderate

Assuming that inflation and economic growth track with Morgan Stanley forecasts, developed market central banks likely won't take drastic measures to dampen growth.

While the US Federal Reserve has started tapering its asset purchases, Morgan Stanley economists say the Fed will likely wait until September 2022 to raise interest rates—and that the European Central Bank could hold off until late 2023. Elsewhere in the world, many central banks have already started normalizing monetary policy, although the team doesn’t expect banks will abruptly set rates back to neutral, let alone into a restrictive stance.

Meanwhile, business investment has recovered faster than global growth and more significantly than in recent downturns. Recoveries driven by investment spending can be durable, and if new capital investment embodies greater technological advancement, then productivity could be boosted as well, further lessening inflationary pressures and allowing strong growth to continue.

Global GDP expected to reach the pre-Covid path in 3Q23

Line chart displaying Global GDP.

Source: Haver Analytics, IMF, national sources, Morgan Stanley Research forecasts; Note: The pre-Covid GDP path refers to the trajectory that global GDP would have followed prior to the Covid shock and is calculated using the Morgan Stanley Research forecasts as of January 21, 2020.


Taking the long view on labor

Second to inflation, labor constraints are also a primary concern for investors, and the two often go hand in hand. Labor challenges are most prevalent in the US, but the worst may be over.

While an aging population will likely continue to create labor challenges, prime-age labor participation—ages 25 to 54—has already begun to rise, and improving childcare, falling health risks, and rising wages should accelerate that trend.

Asian emerging markets back in business

Broadly speaking, Morgan Stanley economists believe emerging market growth will remain strong in the year ahead with GDP growing 4.9% for all EM markets, though slow growth in Brazil (0.5%) and Russia (2.7%) drag down the average.

In fact, the outlook is considerably better for Asian emerging markets, with GDP growth in the Asia region (excluding Japan) outperforming at 5.7%. India and Indonesia are rebounding strongly, helped by business-friendly structural reforms, strong capital investments, and rising vaccination rates.

However, growth in the world’s second-largest economy, China, appears to be at an inflection point. In 2021, withdrawal of policy support and a wide-ranging regulatory tightening across property, carbon emissions, and tech sectors have slowed its expansion.

The China economics team believes growth will recover to 5.5% next year, which is higher than the consensus but significantly lower than China’s recent past.

The source of this Morgan Stanley article, 2022 Global Macro Outlook: Growth Despite Inflation, was originally published on December 9, 2021.

  1. Morgan Stanley Research, “2022 Global Macro Outlook: Normalizing but Not Normal,” 11/14/21

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