BENGALURU, Jan 28 Reuters - Persistently high inflation will affect the world economy this year, according to a poll by economists who trimmed their global growth outlook on fears of a slowing demand and the risk of interest rates rising faster than assumed so far.
This is a departure from just three months ago when most economists were siding with central bankers in their prevalent view that a surge in inflation would be transitory, due to the pandemic-related supply bottlenecks.
The inflation outlook is a lot more stable than three months ago when price pressures are still expected to ease in 2023.
The global growth forecasts were downgraded by economists at the same time. After expanding 5.8% last year, the world economy is expected to slow to 4.3% growth in 2022, down from 4.5% predicted in October, in part due to higher interest rates and costs of living. Growth is slowing down to 3.6% and 3.2% in 2023 and 2024, respectively.
Nearly 40% of those who answered an additional question singled out inflation as the top risk to the global economy this year, with nearly 35% picking coronaviruses and 22% worried about central banks moving too quickly.
The odds of an accident have gone up and the likelihood of a soft landing in 2022 requires some favourable assumptions and good luck, according to Deutsche Bank group chief economist David Folkerts-Landau, as well as international political tensions, as well as high inflation, the persistence of supply chain strains and the Pandemic.
According to the Reuters polls, 18 of 24 major central banks were expected to lift rates at least once this year, compared to 11 in the October poll.
The U.S. Federal Reserve said on Wednesday it would raise the benchmark federal funds rate from a record low of 0 - 0.25% in March after shuttering its bond purchase programme.
The Bank of England is expected to act again soon after the Pandemic started and is expected to continue. The Bank of Canada is expected to hike soon, and is the first major central bank to raise rates.
Most economists think that the Bank of Japan and the European Central Bank will stay put until the end of next year.
While the tightening cycle is in early days in developed markets, many emerging market central banks, with a few notable exceptions like Brazil and China, are waiting for the Fed's cue while they grapple with the Pandemic and their own economic challenges.
Over the past three decades, developed market central banks have been inclined to see supply shocks boosting inflation as a drag on growth that should be cushioned, said Joseph Lupton, global economist at J.P. Morgan.
Emerging economies are facing a similar challenge, with major central banks showing concern about bringing inflation expectations close to their targets.
The pressure on emerging market central banks to act to anchor inflationary expectations is likely to increase, Lupton said.
The growth outlook for over 60% of the 46 economies covered in the polls was either downgraded or left unchanged for 2022 and about 90% of respondents, 144 of 163, said there was a downside risk to their forecasts.
Most countries saw cuts in growth forecasts for the fourth quarter and the current one, due to the spread of the Omicron coronaviruses, but they were expected to rebound next quarter.