On the December PGIM CIOs Call hosted by PGIM Quantitative Solutions, chief investment officers and senior investment professionals from PGIM’s international businesses, PGIM Fixed Income, and PGIM Quantitative Solutions discussed the global economic recovery, the outlook for inflation and the potential impact of the COVID-19 Omicron variant on global growth and the financial markets.
The December PGIM CIO Call participants discussed the prospects for the global economy, which was already facing inflation headwinds and now is buffeted by uncertainty created by the discovery of another COVID variant, Omicron. This comes against a backdrop of a large increase in Delta variant cases in Europe, raising the specter of fresh lockdowns and other restrictive measures. Potential fallout from the discovery of the Omicron variant puts another speedbump in the path to global economic recovery, which was poised to accelerate in the final quarter of 2021 as Delta variant fears abated and signs emerged that supply-chain disruptions were slowly easing. The call participants noted that absent major shutdowns from the Omicron variant, the global recovery should remain on track, and inflation pressures are likely to ease over the coming months. Inflation has become a focus of global policy makers, who have begun to concede that inflation is more than "transitory."
Global GDP growth remains on track to rebound in the final quarter of 2021 after the hit to economic activity in Q3 from the COVID-19 Delta variant. However, the sharp rise in new cases in Europe in mid-November and the arrival of Omicron, has increased the uncertainty about the pace of growth for the remainder of the quarter and into early 2022. US GDP growth is expected to rebound in Q4, after slower consumer spending, especially on autos, depressed Q3 growth. In Europe, growth is likely to take a hit as the rise in COVID-19 cases has led to renewed lockdowns in Austria, the Netherlands and parts of Germany. Emerging markets (EM) growth is on track to strengthen in Q4 driven by EM Asia, while EM Europe and Latin America are expected to post relatively modest growth for the quarter.
Meanwhile, inflation remains elevated.
Persistently high inflation has raised concerns among policymakers and markets amid continued supply bottlenecks and elevated commodity prices. However, the call participants reiterated the view from November that supply-chain disruptions probably have peaked and inflationary pressure is likely to subside. They note that while these concerns have increased market volatility, we are seeing initial signs that supply-chain disruptions are easing. Thus, the base case is for a respite from current high levels of inflation in early 2022, but inflation could still remain elevated in coming months.
Global central banks remain on track to remove monetary accommodation by reducing asset purchases, with some starting to hike rates because of elevated inflation. Recent testimony from Federal Reserve (Fed) Chair Powell and other members of the Federal Open Market Committee signaled a shift towards increased concern about elevated inflation and suggests that they might cut back on asset purchases more aggressively than previously expected. The divergence in inflationary outcomes across emerging markets is reflected in EM central banks’ policy moves with most Latin America and Europe, Middle East and Africa (EMEA) central banks shifting to a tightening stance, while EM Asia has mostly held monetary policy steady in 2021.
Overall, the macroeconomic backdrop remains supportive of risky assets given the growth rebound after the Q3 slowdown. However, the outlook for economic activity in 2022 is clouded by the most recent rise in COVID-Delta cases and the emergence of the Omicron variant. Global central banks continue to remove monetary accommodation to stem inflation by reducing asset purchases and by hiking rates. With monetary policy acting with lags, these tightening measures run the risk of coming into effect at a time when both growth and inflation could naturally slow in 2022.
Further, the Omicron variant is likely to complicate central banks’ task as they try to rein in inflation. When the COVID-19 pandemic first hit the global economy in March 2020, inflation was low and policy makers could bring out the heavy artillery to fight the growth recession. But policymakers now have a more difficult trade-off as they strive to curb inflation and prevent growth from slowing. While the general consensus among the call participants was that the macro backdrop still remains supportive for risky assets, the fresh risk from the spread of the Omicron variant and elevated inflation is likely to increase market volatility. Hence caution is needed until there is clarity on the transmissibility and virulence of the Omicron variant and the effectiveness of current vaccines against the new variant.
All data from PGIM Quantitative Solutions unless otherwise noted.