Aviva Investors, the global asset management business of Aviva plc (‘Aviva’), expects global growth to slow in 2022 but remain robust. World GDP growth is likely to be around four per cent this year and just above three per cent in 2023.
Post-pandemic catch-up should continue, but the outlook has been significantly clouded by the Russian invasion of Ukraine. This has also exacerbated the spike in energy and commodity prices. The economic damage will be greatest in parts of Europe. The geo-political backdrop has been changed permanently by Russia’s actions and there are clearly greater dangers of an uncomfortable division of factions across the world. How China positions itself will be a critical element of any new world order.
High inflation is already eroding household real incomes and hurting sentiment, both of which will act as a brake on growth this year and next. Inflation is still expected to fall back later this year and during 2023, but the risk of a more damaging and lasting episode has risen. Comparisons to the stagflation of the 1970s are probably excessive, but there are some similarities.
Slower growth and high inflation put central banks in a difficult position, but most have clearly signalled a need for significantly tighter monetary policy, with the most forceful message coming from the US. Policy rates may need to move above neutral to slow growth and bring inflation back to target. This raises the risk of excessive policy-induced slowdown.
Michael Grady, head of investment strategy and chief economist at Aviva Investors, said:
“Recent events in Ukraine serve to highlight the fragility of the global geopolitical and economic order. These are likely to usher in a period of greater uncertainty, increased economic and market volatility and more challenging asset allocation decisions.
“With growth expected to remain above trend this year, and corporate pricing power seemingly robust, we prefer to be modestly overweight equities in developed markets, with a more neutral view in emerging markets. Recent spread widening in credit markets has provided an opportunity to move from a preferred underweight to neutral.
“With positive inflation surprises more likely and policy rates rising significantly to address overshoots, inflation risk premia need to be higher, while real rates need to adjust to slow growth. As such, we prefer to be underweight duration.”