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Geopolitical uncertainty and high inflation take their toll on the global economy

KPMG International Global Economic Outlook report - H2 FY22

 

  • Market volatility and investors’ concerns could see tighter global financial conditions
  • Depreciating currencies and rising borrowing costs have exposed vulnerabilities and increased the risk of contagion.
  • KPMG forecasts GDP growth of 1.9 percent and inflation at 4.7 percent in 2023 for the global economy

KPMG Global Economic Outlook H2 2022

Growing geopolitical uncertainty and inflationary pressures are set to take their toll on global economic growth projections, according to the latest KPMG Global Economic Outlook.

The global organization is forecasting GDP growth of 1.9 percent in 2023, down from 2.7 percent in 2022, as the world grapples with a multitude of economic and political challenges. Weaker growth could see inflation moderate to 4.7 percent in 2023 after averaging 7.6 percent in 2022.

The report warns an acceleration in inflation is putting pressure on households’ finances and businesses’ margins, while leading central banks to tighten monetary policy aggressively, with recession once again on the horizon in many economies.

Rising costs are taking their toll on consumers, with a cost-of-living crisis putting a significant dent on households’ purchasing power. Consumer confidence has taken a big knock across most economies and spending are following suit, causing overall economic growth to weaken.

The need for fiscal support is likely to stoke more inflation in the medium term, placing fiscal policy actions at odds with the aims of central banks in meeting their mandates. Our latest forecast suggests that tightening monetary policy will moderate inflation, but inflationary pressures are likely to linger for longer. That is why central banks are likely to be more hawkish in their response to what could be a relatively short-lived burst in inflation. A very aggressive cycle of monetary tightening across the world could impose high costs for the global economy as it emerges from another synchronised shock. Other policy tools and further reforms to open up supply could be deployed to ease the burden on central banks.

Yael Selfin

Chief Economist

KPMG in the UK

Yael Selfin Aizig

Energy uncertainty driven by conflict in Ukraine Although inflationary pressures were already present as economies reopened from Covid, the invasion of Ukraine by Russia added an extra strain, with a range of commodities exported by the region seeing their price rise significantly. More recently, some prices have moderated somewhat and supplies have adjusted while demand is easing as the economy slows.

Energy prices have been at the centre of the inflationary surge, although oil prices have moderated recently, which contributed to a minor ease in annual inflation figures in many countries recently. Nevertheless, the price of gas across many regions remains heavily impacted by the conflict in Ukraine, with the rush to secure shipments of liquefied natural gas (LNG) for winter causing not just European but also Asian gas prices to spike recently. It is still uncertain whether sufficient gas supply will be forthcoming over the winter months. This could prove a significant blow to the short-term outlook of some European economies which are more reliant on Russian supply.

Supply chain and labor market issues adding to uncertainty

The combination of supply chain bottlenecks, generous government spending, tight labor markets and a commodity shock triggered by the Russian invasion of Ukraine, have together caused inflation to shoot well above central banks’ target across many developed economies.

KPMG’s Global Economic Outlook expects inflation to moderate significantly from the middle of next year, as the energy shock is no longer reflected in the year-on-year inflation calculation. However, the world could be entering an environment that is structurally more inflationary, as production costs - from materials to energy and labor - remain elevated.

Faced with inflation well above target, an immediate concern for most central banks is that inflation expectations stay high, while their credibility in fighting inflation is lost. That is why central banks are likely to be more hawkish in their response to what could be a relatively short-lived burst in inflation, with markets pencilling in aggressive rate rises over the coming months. Moreover, if inflationary pressures are to become embedded, interest rates may stay at higher levels than what we saw in the past decade even after the current spike in inflation subsides. This would represent a significant shift in monetary policy in a relatively short space of time.

An uneven recovery from Covid

With the easing of Covid restrictions across the majority of the world, there was cautious optimism of an international post-pandemic bounce, but KPMG’s analysis reveals economic recovery was uneven and relatively short-lived before new challenges including supply-chain issues and subsequently the war in Ukraine began.

There are also fears a potential spike in cases during the Northern Hemisphere’s winter months could see a return to some restrictions, causing more disruptions to production and economic output – particularly in China, which continues to implement a zero-Covid policy. A rise in cases could also see a tighter labor market and increased pressure on health services, as well as additional burden on public finances.

It’s hard to downplay the scale of the geopolitical and economic uncertainty facing every one of us – from individual households to governments and business leaders. We entered the year with a degree of cautious optimism as Covid restrictions were gradually eased, but what followed was a series of challenges that have tested the resilience of even the most robust, sustainable companies. The international outlook is patchy. Some countries, regions and territories achieved a strong post-pandemic rebound, for others – chronic political and economic challenges dampened hopes of regaining lost ground. It’s a similar story across all areas of analysis – with different outlooks and outcomes in different areas. That said, there are a number of universally consistent themes and stories. The rapid return to economic activity after Covid created supply chain challenges which appear to be easing slightly but continue to drag down growth projections. Combined with the devastating war in Ukraine, C-suites are grappling with shortages in everything from oil and gas to wheat and microchips. This has had a significant impact on both inflation and recessionary fears.

Regina Mayor

Principal, Senior Energy Advisor

KPMG in the U.S.

To access the full report, visit: kpmg.com/globaleconomicoutlook

For media queries, please contact:

Brian O’Neill, Senior Manager, Global External Communications
T: +44 7823 668689
E: Brian.O’Neill@kpmg.co.uk

About KPMG Global Economic Outlook

KPMG’s Global Economic Outlook provides bi-annual economic forecasts, produced by macroeconomics teams across KPMG’s global network using a suite of external and in-house models capturing the main inter-relationships in the world economy. As with all forecasts, these are subject to considerable uncertainty and the outturn may differ significantly.

About KPMG International

KPMG is a global organization of independent professional services firms providing Audit, Tax and Advisory services. KPMG is the brand under which the member firms of KPMG International Limited (“KPMG International”) operate and provide professional services. “KPMG” is used to refer to individual member firms within the KPMG organization or to one or more member firms collectively.

KPMG firms operate in 144 countries and territories with more than 236,000 partners and employees working in member firms around the world. Each KPMG firm is a legally distinct and separate entity and describes itself as such. Each KPMG member firm is responsible for its own obligations and liabilities.

KPMG International Limited is a private English company limited by guarantee. KPMG International Limited and its related entities do not provide services to clients.

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Yael Selfin

Vice Chair and Chief Economist

KPMG in the UK