World Economic Prospects Monthly

Abstract

Overview: Covid cases surge, worsening Q1 slowdown ▀ Although some of the initial worst fears about Omicron have proved unfounded, the unexpectedly large surge in global Covid‐19 cases is causing more cautious behaviour by individuals and greater disruption to businesses than envisaged. We have cut our Q1 GDP forecast again and now expect world GDP growth of 4.2% in 2022, down from 4.3% a month ago and the 5.8% estimated for 2021. ▀ There remain plenty of unknowns regarding the Omicron variant and its health impact. But the evidence from economies such as South Africa, the UK and Denmark suggests that the Omicron wave is likely to be associated with much smaller rises in hospitalisations than earlier Covid waves. And for now, our initial assessment that there would only be a modest reimposition of mobility restrictions is correct. ▀ Nonetheless, the rise in global Covid cases to more than double the previous peak has exceeded expectations of a month ago by a large margin and points to greater economic damage via increased voluntary social distancing and disruption to businesses from staff having to self‐isolate. In response, we have lowered global GDP growth further in Q1. ▀ As with previous Covid waves, we expect activity to rebound quickly when cases start to fall back, so the downward revision to the outlook in Q1 will be largely offset by a bigger bounce in Q2. Nonetheless, the weak start to the year will dampen overall 2022 growth slightly. ▀ Meanwhile, greater disruption in the near term — especially in China where a zerotolerance approach to Covid continues to be pursued— points to slower normalisation of supply‐chain pressures and potentially a slower transition of consumer spending from goods back to services. Partly due to this, we have lifted our 2022 global CPI inflation forecast by 0.3pp to 4.5%. But inflation is still expected to fall sharply over the course of year, limiting the need for aggressive monetary policy tightening.