The global economy has exceeded expectations in 2021, with a more positive first half than expected, driven by the reopening and thanks to vaccinations, but with a more moderate second half, affected by disruptions in value chains and escalating inflation. The last few weeks are marked by the increase in infections – due to the omicron variant -, although its economic impact, possibly small (but still uncertain), will already be the story of next year.
A strong global recovery was expected in early 2021, marked by the massive distribution of vaccines, continued support from monetary and fiscal policies, and moderation in financial risks. BBVA Research pointed to GDP growth of 3.6% in the United States and 4.1% in the euro area, which represented a significant rebound after the sharp falls in 2020. However, the risks were numerous and the uncertainty very high, but they were linked to the covid and the rise in public and private indebtedness after the massive stimuli implemented in the previous year. Inflation was just one more risk.
At the end of the first half of the year, growth results for the United States and the euro area exceeded expectations. Vaccination campaigns were somewhat slower than desired in some countries, due to a greater rejection of the desirable, but in general they have had the expected impact on economic activity and it has also been found that Successive waves of COVID have had a diminishing impact on activity.
What was not anticipated was the onset of inflation or, at least, the type of inflation that we have seen since last spring. In the debates at the beginning of the year, inflationary risks were linked to potential excess demand in the United States due to the massive fiscal plans of the new administration, which seemed to arrive at the wrong time, as the economy was recovering rapidly. Seen in perspective, the reality is that the fiscal packages have been approved late and have been less than expected —the second runs the risk of not being approved— and the role of fiscal policy on inflation is less controversial.
But nevertheless, the surprise has been the appearance of bottlenecks in manufacturing production, something that not only It has affected inflation, but it seems to have had a non-negligible impact on the pace of activity, which has slowed down during the third quarter of the year. These bottlenecks have not been affected only by supply factors – production processes and transport delayed by the impact of the pandemic – but by a strong rebound in demand (synchronized reopening in many economies, stagnant demand, disposition of forced savings during the pandemic) and its bias towards goods versus services.
All of it, together with the accumulation of problems around the prices of raw materials –linked in part, but not only, to the pandemica— they have created the perfect inflation storm in which we are immersed — especially the United States, but also in emerging economies, and in Europe.
On the other hand, inflationary pressures, even largely due to persistent but temporary factors linked to the pandemic and the recovery of activity and employment, have finally made the main central banks react, which have accelerated their plans to withdraw monetary stimuli to anchor inflation expectations, what has had effect in emerging countries, induced in turn to raise rates earlier and faster.
In the end, economic growth in 2021 will be around 5.6% in the United States and 5.1% in the euro area, well above what was expected at the beginning of the year. Recovery is expected to continue by 2022, but two important questions remain: the severity of the new wave of the pandemic and its economic impact, and the rate at which inflation moderates. Of this two unknowns depends on the performance of the global economy for next year.
