Morgan Stanley
  • Research
  • December 14, 2021

2022 Global Macro Outlook: Growth Despite Inflation

The surge in global inflation has investors fretting about future growth, but Morgan Stanley economists say price surges will subside, making way for 4.7% global GDP growth in 2022. Here’s the view on the global economy.

It's impossible to talk about the 2022 global economic outlook without addressing the proverbial elephant in the room: inflation. For decades, significant price growth eluded most major markets. Then, suddenly, a surge in demand coming out of the COVID-19 recession, coupled with lingering supply-chain disruptions and labour shortages, created a perfect storm for price increases.

Inflation for developed markets is on track to reach 4.7% at the end of this year—not an insignificant number—and in a typical economic cycle, this would be a clear signal for central banks to raise rates and pump the brakes on growth.  Then again, this cycle has been anything but typical. “Things are normalising,” says Morgan Stanley's Chief Global Economist Seth Carpenter, “but they are not normal.”

While inflation dynamics will vary by country as supply chains and labour markets stabilise at different rates, the economics team at Morgan Stanley Research forecasts that inflation in major markets will “peak then retreat” by more than two percentage points over the course of 2022.

Monetary policy is likely to tighten but less than investors fear, while strong capital expenditures, improving supply chains and other normalizing forces add up to Morgan Stanley's above-consensus outlook of 4.7% GDP growth for 2022.

Morgan Stanley Real GDP Forecasts (Year/Year)

GDP (%Y) 2021E 2022E 2023E
MS MS Consensus MS Consensus
Global 6.1 4.7 4.3 3.8 3.6
G10 5.0 4.4 4.0 2.9 2.2
U.S. 5.5 4.6 4.0 3.7 2.4
Euro Area 5.2 4.6 4.3 2.5 2.1
Japan 1.9 2.9 2.6 1.6 1.3
UK 6.9 4.6 5.0 1.6 2.0
EM* 6.9 4.9 4.6 4.5 4.7
China 7.8 5.5 5.0 4.8 5.4
India 8.9 7.5 6.8 7.3 7.2
Brazil 4.8 0.5 1.0 1.8 2.0
Russia 4.4 2.7 2.5 2.5 2.1
Source: Bloomberg, Haver Analytics, IMF, Morgan Stanley Research forecasts. Note: Aggregates are PPP-weighted. Brazil consensus number taken from BCB market expectations survey. China consensus reflects a subset of peers.

Supply Chain Disruptions Should Dissipate

Globally, supply chain disruptions are a major driver of recent inflation, and “based on surveys and feedback from our equity analysts, we believe we are now at, or close to, the worst level of supply chain disruption,” says Carpenter.

Strong global inflation now, but receding next year

Source: Haver Analytics, Morgan Stanley Research forecasts; Note: The global aggregate is a weighted average using PPP weights.

In the U.S., Chief U.S. Economist Ellen Zentner says that U.S. supply chains are on the verge of recovery and that commodity price increases are also set to subside. The U.S. economics team says a strong capex cycle, increased inventory-building and deferred demand should drive U.S. GDP growth of 4.6% for 2022.

This isn’t to say all inflation is transitory. Prices for some categories in the U.S.—including housing—are expected to continue rising to reflect normal cyclical dynamics. “The key distinction in our minds is that temporary inflation is measured in multiple percentage points, whereas the permanent rise in inflation is measured in tenths,” Zentner says.

European Inflation Is Fleeting

Soaring demand and the hangover of supply constraints are affecting global markets differently. In Europe, for example, Morgan Stanley economists see inflation dropping from 4.1% at the end of 2021 to 3.1% by the first quarter of 2022, and eventually dipping below the European Central Bank's (ECB) target inflation rate of 2%. “Even with continued strong European growth next year, and a tightening labour market, we expect core inflation to be below the ECB's target in 2023,” says European economist Jacob Nell, who attributes this in part to the lingering effects of persistently low historical inflation.

That said, the European economy is on track to recover to prepandemic levels by the end of this year and is poised for 4.6% GDP growth in 2022, as a strong labour market supports improving consumer spending.

Monetary Tightening Will Be Moderate

Assuming that inflation and economic growth track with Morgan Stanley forecasts, developed market central banks likely won't take drastic measures to dampen growth.

While the U.S. Federal Reserve has started tapering its asset purchases, Morgan Stanley economists say the Fed will likely wait until early 2023 to raise interest rates—and that the ECB could hold off until late 2023. Elsewhere in the world, many central banks have already started normalising monetary policy. “But we do not think banks will abruptly set rates back to neutral, let alone into a restrictive stance,” Carpenter says.

Meanwhile, business investment has recovered faster than global growth and more significantly than in recent downturns. “Recoveries driven by investment spending can be durable, and if new capital investment embodies greater technological advancement, then productivity could be boosted as well, further lessening inflationary pressures and allowing strong growth to continue,” he adds. These and other factors could keep global GDP on a pre-COVID path. 

Global GDP to reach the pre-COVID path in 3Q23

Source: Haver Analytics, IMF, national sources, Morgan Stanley Research forecasts; Note: The pre-COVID GDP path refers to the trajectory that global GDP would have followed prior to the COVID shock and is calculated using Morgan Stanley Research forecasts as of Jan. 21, 2020.

Taking the Long View on Labour

Second to inflation, labour constraints are also a primary concern for investors, and the two often go hand in hand. Labour challenges are most prevalent in the U.S., but the worst may be over.

“We expect a typical cyclical recovery as the pandemic recedes and the economic recovery continues,” says Zentner, who gives the caveat that an aging population will continue to create labour challenges. “Prime-age labour participation—ages 25 to 54—has already begun to rise, and improving childcare, falling health risks and rising wages should accelerate that trend.”

U.S. labour force participation has been slow to come back, though prime-age participation should exceed pre-COVID levels in 2H22
U.S. labour force participation (%)

Source: BLS, Morgan Stanley Research forecasts

Asian Emerging Markets Back in Business

Broadly speaking, Morgan Stanley economists believe emerging market growth will remain strong in the year ahead with GDP growing 4.9% for all EM markets, though slow growth in Brazil (0.5%) and Russia (2.7%) drag down the average.

In fact, the outlook is considerably better for Asian emerging markets, with GDP growth in the Asia region (excluding Japan) outperforming at 5.7%.  India and Indonesia are rebounding strongly, helped by business-friendly structural reforms, strong capital investments and rising vaccination rates.

“We expect a fully-fledged growth recovery with all drivers firing and macro stability indicators remaining range-bound,” says Chief Asia Economist Chetan Ahya, whose team is forecasting 7.5% GDP growth for India in 2022. In North Asia economies like Korea and Taiwan, the outlook is bolstered by strong domestic growth, coupled with a global backlog in demand for semiconductors. 

China Marches to Its Own Beat

Growth in the world’s second-largest economy, China, is now at an inflection point. In 2021, withdrawal of policy support and a wide-ranging regulatory tightening across property, carbon emissions and tech sectors have slowed its expansion. 

China's regulatory reset could knock down 2022-25 GDP growth by 40bp
(China GDP)

Source: CEIC, Morgan Stanley Research estimates

“The key factor in our outlook is that the slowdown was effectively caused by policy tightening and we expect the rebound to be driven by policy easing,” says Robin Xing, Chief China Economist. “The Regulatory Reset has also moved to a more institutional phase. This implies calibrated implementation—rather than new aggressive measures—would be the next focus.”

The China Economics team believes growth will recover to 5.5% next year, which is higher than the consensus but significantly lower than China’s recent past. Thereafter, China’s GDP growth will likely slow to 4.8% in 2023 and hover just above 4% for the foreseeable future.


For more Morgan Stanley Research on Global Strategy, ask your Morgan Stanley representative or financial adviser for the full report “2022 Global Macro Outlook: Normalizing but Not Normal" (Nov 14, 2021). Plus, more Ideas from Morgan Stanley's thought leaders.