Global Economic Outlook – The Fed kills the cycle

The global economy is facing multiple headwinds, which in our new baseline scenario likely ends in recession. China is contracting as a result of its zero-Covid strategy, although growth should rebound later this year. Russia is in a sharp recession as a result of Western sanctions, even if the depth isn’t as bad as initially expected. And in Europe, the energy price spike is driving a rapid terms of trade deterioration, which will squeeze real incomes and crimp consumption.

However, the biggest challenge lies in the US. The inflation overshoot likely requires a significant rise in US unemployment to be brought under control. Our baseline envisages further sharp interest rate hikes and tighter financial conditions causing a recession to bring this about. In turn, a contraction in the world’s largest economy would have large negative global growth spill overs.

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Global economic forecast summary

Global economic forecast summary

Source: abrdn, as of June 2022

The “r word”

The “r word” is the talk of financial markets, but it is important to distinguish the varying sources, geographies, and time horizons of recession risk in the global economy.

Two of the big economies are already in contraction, albeit temporarily so. China’s zero-covid strategy is unsustainable and we expect it to be dropped after the 20th Congress in Q4. In the meantime, strict lockdowns in Shanghai have caused a short, sharp fall in Chinese real GDP of about 2% q/q in Q2. Chinese growth will rebound with the Shanghai lockdown now being eased, but the risk of further lockdowns remains until the zero-Covid policy is abandoned. China’s 2022 growth target is now unattainable, and this is reflected in our subdued forecast profile for the country

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