Economic overview: March quarter 2022

The global economy is estimated to have grown by 5.9% in 2021 following the 3.1% contraction in 2020 due to COVID-19. Growth is expected to slow in 2022 as stimulus support ends in advanced countries and supply chain bottlenecks from COVID-19 disrupt production.

Because of the uncertainty surrounding COVID-19, ABARES has prepared two alternative macroeconomic scenarios over the medium term for the global recovery. These two scenarios underpin the agricultural commodity forecasts. The ‘faster recovery’ scenario assumes a gradual global relaxation of COVID-related restrictions and that there will be no new variants which require their reimposition. It also assumes that supply chain disruptions and inflationary pressures dissipate over the next 18 months. This scenario forms the basis for ABARES forecasts for 2022–23, but uncertainties in the short run, if realised, could have longer run implications affecting agricultural markets. To account for these, the ‘slower recovery’ scenario assumes that global growth is significantly slowed by further COVID-19 outbreaks, inflationary pressures and supply chain disruptions in the short term, and that they continue to weigh on growth until around 2024–25. For a more detailed explanation of the economic scenarios used in the outlook, see the Agricultural overview.

Under the faster recovery scenario, global growth is assumed to moderate gradually, averaging 4.4% in 2022 and 3.8% in 2023. In contrast, under the slower recovery scenario, global growth is expected to slow markedly to 1.9% in 2022 before accelerating each year to 2025 when it reaches 3.7%. In the outer years under both scenarios, growth is assumed to slow to a longer-run rate of 3.1% by 2027 (Figure 1.1).

Faster recovery scenario uses growth forecasts in line with the International Monetary Fund’s January 2022 World Economic Outlook Update. Slower recovery scenario uses growth in 2022 in line with the 90th percentile forecast from the World Bank's January 2022 Global Economic Prospects and recovering slowly over the forecast period.
Sources: ABARES; International Monetary Fund

On a per-person basis, global incomes are assumed to be around 16% higher in real terms in 2027 than they were in 2021 under the faster recovery scenario, and around 12% higher under the lower recovery scenario. Advanced economy incomes are assumed to grow by between 12% and 10% across the two scenarios, while emerging and developing economy incomes are assumed to grow by between 22% and 16%. Income growth in emerging Asian countries is expected to be among the most rapid. Incomes in China are assumed to grow by between 33% and 27% per person, and incomes in the ASEAN region by between 31% and 21% by 2027.

Despite the global economy recovering to its pre-pandemic level of real GDP in 2021, the recovery has been uneven across regions. Advanced economies made a rapid recovery to their pre-pandemic level of output in 2021. This reflects the large fiscal stimulus packages and accommodative monetary policy provided by governments and central banks in these economies. These actions boosted demand for goods, and the rapid rollout of vaccines allowed for the easing of mobility restrictions. China also grew rapidly in 2021, after avoiding a contraction in 2020. China's growth was driven by increased manufacturing activity and strong global demand for its exports. In contrast, the recovery in other emerging and developing countries was relatively slower and this group did not recover to its pre-pandemic level of output in 2021. This slower recovery reflects the lower vaccination rates and less policy support available to deal with the effects of COVID-19 outbreaks. Fiscal stimulus packages in emerging economies were on average less than a quarter of the size of those in advanced economies, and central banks in countries such as Russia and Brazil began aggressively raising interest rates throughout 2021 to deal with rising inflation.

In 2022, growth in advanced economies is assumed to be 3.9% in the faster recovery scenario and 1.1% in the slower recovery scenario. In both scenarios growth is assumed to slow considerably from the 5.0% growth in 2021, which reflects the ending of large stimulus programs and the easing of pent-up demand from consumers who accumulated extra savings during pandemic lockdowns. The extent of the slowdown between the scenarios is largely contingent on the monetary policy responses to inflationary pressures and supply chain disruptions. If continued, supply chain bottlenecks will lead to slowdowns in production as industries face shortages of labour and restricted access to inputs which will drive inflationary pressures. Higher inflation will lead central banks to raise interest rates and reduce bond-buying programs to contain rising prices which will raise the costs of borrowing, and slow household expenditure and investment.

In emerging and developing economies, growth in 2022 is assumed to be 4.8% in the faster recovery scenario and 2.5% in the slower recovery scenario. These represent a slowdown from the growth rate of 6.4% in 2021. Emerging economies have lower rates of vaccinations than advanced economies and will be less able to contain outbreaks of the virus which will limit growth. Ongoing outbreaks and the potential for a more disruptive variant in the slower recovery scenario will mean growth will be markedly slower in 2022. China is expected to slow markedly in 2022 under this scenario due to lower domestic consumption. This reflects assumed shutdowns in accordance with the government’s zero-tolerance COVID-19 policy. South-East Asian countries, which include some major export markets for Australian agriculture, have also been adversely affected by significantly lower tourism, which is assumed to continue if outbreaks of the virus continue. This will keep demand for agricultural imports into the region subdued due to lower local incomes and lower food demand from the hospitality industry.

Global growth over the medium term is still largely uncertain. Under the faster recovery scenario, growth is assumed to gradually slow from 4.4% in 2022 to 3.1% by 2025 and remain at that level for the remainder of the outlook period. This scenario reflects a gradual return to a normal long-run rate of growth in line with the assumptions of the IMF's January World Economic Outlook Update.

Under the slower recovery scenario, growth is assumed to accelerate gradually from the low rate of 1.9% in 2022 to 2.3% in 2023 and 2.7% in 2024. This acceleration reflects a gradual rollout of vaccines in developing countries, and the slow recovery of international supply chains. In 2025, growth is expected to accelerate more rapidly to 3.7% as the supply disruptions and inflationary pressures are assumed to be brought under control. Growth will then ease back to the longer-run growth rate of 3.1% by 2027.

Despite growth returning to similar rates by the end of the outlook period in both scenarios, the slower recovery scenario results in lower incomes, with the effect more strongly felt in developing economies. In the slower recovery scenario, global GDP in 2027 is expected to be around 4.3% lower than in the higher growth scenario. In the same year, GDP of advanced economies is assumed to be 2.3% lower, and GDP of emerging and developing countries is expected to be 5.7% lower.

Pandemic-induced lockdowns caused a large shift in consumption patterns in advanced economies away from services and towards purchases of goods. This shift caused a large increase in demand for transport services, which pushed up prices and shipping times for sea freight. Adding to this, labour force absences due to COVID-19 and truck trailer shortages have caused bottlenecks at ports, slowing the unloading and reloading of container ships. These supply issues have led to shortages of consumer goods and producer inputs, which has added to consumer price inflation and slowed production.

The shift in consumption patterns to goods has also caused changes to shipping patterns. The enormous demand for exported Chinese goods in large, advanced economies such as the United States has subsequently increased demand from Chinese exporters for shipping container routes leaving Asian ports. This has led to shipping container shortages and significant increases in shipping prices on these routes, with the price to ship a container from Shanghai to Los Angeles rising as much as 600% between 2019 and 2021. This is causing some shipping companies to switch from other routes in the region or forego stops they would otherwise make to take advantage of lucrative Chinese routes. As a side effect for Australian exporters, this has decreased the supply of ships travelling from Australia to other regions, such as the Middle East and South Asia, causing the routes to become more expensive. This directly affects Australian exports of agricultural products such as meat, livestock products, wine and horticulture which are predominantly shipped in containers. The same rises in shipping prices are not as present in bulk shipping, so will not affect grains and other crops to the same degree.

Supply chain disruptions are expected to continue while consumption demand for goods remains high. This will gradually ease as consumers in advanced economies shift spending back to services, such as dining out and travel, that they forewent during the pandemic. The faster recovery scenario assumes that this will occur gradually over 2022 and 2023. The slower recovery scenario assumes that this will take longer to unwind, persisting until 2024 to 2025.

Commodity prices rose markedly in 2021 as supply was unable to keep up with demand (Figure 1.2). Energy prices shot up in the second half of the year driven by rapidly increasing demand for natural gas. Adverse weather events led some countries to increase gas use for heating and cooling, while weather events also disrupted production of thermal coal and renewables. Metallurgical coal prices also rose significantly in 2021 due to strong demand from Chinese steel producers. While energy prices showed signs of easing towards the end of 2021, recent geopolitical developments have added upward pressure to prices at the start of 2022. Tensions on the Russian-Ukraine border have kept natural gas and crude oil prices high, and a temporary export ban on coal imposed in January by the Indonesian Government further pushed up prices for coal.

Higher natural gas prices in 2021 have also flowed through to significantly higher fertiliser prices. Urea prices roughly doubled between July and November 2021 as natural gas is a key input in its manufacture. Fertiliser price rises were exacerbated by export restrictions put in place by China and Russia, the world's two largest producers. It has been announced that these restrictions will stay in place until the middle of 2022, which will likely keep fertiliser prices high through to at least the 2022 planting season in Australia.

Source: World Bank

Consumer prices in many countries rose faster than anticipated by central banks over the second half of 2021. Inflation increased to decade highs in many advanced economies (Figure 1.3), reflecting the increased consumer demand for goods, ongoing supply chain disruptions and higher energy prices. Inflation has also proven to be more broad-based than initially believed, with prices rising across fuel, food, shelter, apparel, vehicles and medical services.

Central banks in many advanced economies are expected to respond to higher inflation rates by tightening monetary policy in 2022. Central banks in countries such as New Zealand and the United Kingdom have already begun to raise interest rates. In Australia and the United States, banks have announced the slowing or ending of bond-purchasing operations—programs designed to keep long-term interest rates low. The magnitude of tightening is still uncertain but will depend on how long underlying inflation remains high. If inflation remains high for a long period, future inflation expectations can rise, requiring more significant interest rate hikes to bring down inflation. In the faster recovery scenario, inflationary pressures are expected to dissipate quickly, leading to only slightly higher interest rates. Conversely, in the slower recovery scenario, inflationary pressures are expected to persist for several years, which will require significantly higher interest rates over the outlook period.

Note: Rates shown refer to the preferred measure of inflation by central banks. Dotted line refers to the 2% inflation target used by most central banks. The EU, UK and US central banks target an average rate of 2%, The Reserve Bank of Australia targets between 2% and 3%.
Source: Central banks

The Australian dollar is assumed to average US73 cents in 2021–22. This is a 3% depreciation from 2020–21, driven by falling iron ore prices. In the faster recovery scenario, the Australian dollar is assumed to remain largely unchanged in 2022–23 as downward pressure from falling commodity prices is offset by strengthening economic activity. For the remainder of the outlook, the Australian dollar is assumed to depreciate slightly, averaging US72 cents for 2023–24 to 2026–27. This reflects the Department of Industry, Science, Energy and Resources’ assumption of a longer-term decline in Chinese demand for imported bulk commodities like iron ore and coal as stimulus-led infrastructure spending slows which will put downward pressure on the exchange rate.

In the slower recovery scenario, the Australian dollar is assumed to fall to US69 cents in 2022–23. This reflects an increase in global uncertainty from ongoing COVID-19 outbreaks and prolonged supply chain disruptions which are assumed in this scenario. These factors will put downward pressure on the Australian dollar as investors increase demand for US dollars, which is seen as a safe haven by investors. Over the medium-term in this scenario, the Australian dollar is assumed to depreciate further, averaging US68 cents for 2023–24 to 2026–27. This largely reflects subdued demand which will cause commodity prices to fall further as growth recovers slower in developing countries.