Global Economic Outlook – September 2022 The combination of supply chain bottlenecks, generous Chart 4: Central banks are expected to government spending, tight labor markets and a remain hawkish in the short term commodity shock triggered by the Russian invasion of Ukraine, have together caused inflation to shoot well above 7% central banks’ target across many developed economies. 6% We expect inflation to moderate significantly from the 5% middle of next year, as the energy shock is no longer 4% reflected in the year-on-year inflation calculation. However, 3% we could be entering an environment that is structurally Interest rate more inflationary, as production costs – from materials to 2% energy and labor – remain elevated. 1% 0 Faced with inflation well above targets, an immediate concern for most central banks is that inflation -1% 2018 2019 2020 2021 2022 2023 expectations stay high, while their credibility in fighting inflation is lost. The need for fiscal support is likely to stoke UK US Eurozone more inflation in the medium term, placing fiscal policy Source: BIS, FRED, Refinitiv Datastream, Bank of England, ECB, KPMG analysis. actions at odds with the aims of central banks in meeting Note: Yield curves shown as of 26 September. their mandates. In the cases where investors have been led to question the sustainability of public finances, such Chart 5: Consumer confidence has fallen as the UK in late September 2022, depreciating currencies and rising borrowing costs have exposed vulnerabilities and 40 increased the risk of contagion. 30 That is why central banks are likely to be more hawkish 20 in their response to what could be a relatively short-lived 9 average 10 2-1 1 0 burst in inflation, with markets pencilling in aggressive rate rises over the coming months (Chart 4). -10 -20 Moreover, if inflationary pressures are to become -30 embedded, interest rates may stay at higher levels -40 than what we saw in the past decade even after the Deviation of index from 20 -50 current spike in inflation subsides. This would represent -60 a significant shift in monetary policy in a relatively short Jan Jul Jan Jul Jan Jul Jan Jul 2019 2019 2020 2020 2021 2021 2022 2022 space of time. UK US France Germany India Australia Japan China Rising costs are taking their toll on consumers, with a Source: GfK, The Conference Board, Cabinet Office of Japan, INSEE, Westpac-Melbourne Institute, cost-of-living crisis putting a significant dent on households’ China National Bureau of Statistics, Reserve Bank of India, KPMG analysis. purchasing power. Consumer confidence has taken a big knock across most economies (Chart 5) and spending are Chart 6: World GDP growth and inflation projections following suit, causing overall economic growth to weaken. 8% Our overall forecast for the world economy is for GDP growth to moderate to 1.9% in 2023 after growth of 2.7% 6% in 2022. Weaker growth could see inflation moderate to 4% 4.7% in 2023 after averaging 7.6% in 2022, according to KPMG forecasts (Chart 6). But as economies around hange 2% the world brace for another period of headwinds and slowdown in activity, the hope is that on this occasion the Annual % c0% downturn will be relatively mild. -2% Forecast -4% Yael Selfin 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Chief Economist, KPMG in the UK GDP Inflation Source: World Bank, KPMG projections. © 2022 Copyright owned by one or more of the KPMG International entities. KPMG International entities provide no services to clients. All rights reserved. 6