3Q 2021 Global Economic Outlook

Quick takes:

• Global growth slowed during the third quarter
• Pandemic remains a key impediment to full recovery
• Supply chain and inflation causing some headwinds
• These factors should prove temporary
• U.S economy and CRE should benefit from global expansion

Hitting speedbumps 

On the road to recovery, the global economy hit some speedbumps during the third quarter of 2021. After generating strong economic growth during the second quarter, the economy slowed down during the third quarter. This deceleration seems substantial in magnitude, likely exceeding 300 basis points (bps) of annualized growth. Second quarter global economic growth likely registered roughly 6%, continuing a run of robust growth that began during the second quarter of 2020. Yet because of unresolved issues, the path to a full recovery remains beset by challenges that can slow growth, but not completely stymie underlying momentum. 

The highly contagious Delta variant, first identified in India in late 2020, rapidly spread through India and Great Britain before arriving in the U.S. and spreading there as well. By the summer the variant surged, account for almost all new cases in the U.S., while vaccinations slowed considerably after peaking in early spring. This caused the reimposition of some strictures such as mask mandates but did not require severely clamping down on the supply side of the economy like what occurred in 2020. More importantly, however, the surge impacted the demand side of the economy. As the variant spread, some consumers and businesses altered their behaviors out of concerns over falling ill. Dining out decreased, TSA checkpoint totals began declining as both leisure and business travelers cancelled or postponed trips, and demand for hotels stalled. Such an impact on the U.S. economy, which still accounts for roughly 25% of global GDP, caused a deceleration in global growth. 

Beyond the pandemic, other factors also played pivotal roles. The ongoing supply-side disruptions continue to restrict growth. While the pandemic plays a role in this by keeping sick workers at home or shutting down factories and port facilities, other factors also played pivotal roles in disrupting the supply chain. The persistent and pervasive labor shortage limits the ability of the economy to reach its full potential. Associated higher prices can discourage consumption at the margin, limiting aggregate demand. And restarting, rebuilding, or expanding production always takes longer than simply turning off production – facilities take time to construct, workers must be hired or rehired, etc. And the impact of fiscal stimulus, which boosted growth over the prior four quarters, is beginning to fade. Yet most of these factors appear temporary, not permanent. The Delta wave appears to have peaked and is subsiding. Supply-chain issues are slowly getting resolved, especially as some countries move away from their “zero Covid” policies that force production and port facilities closed. Investment in new production facilities continues to increase. And the cure of high prices is high prices, which tends to boost the supply side of the economy relative to demand, easing pressure on prices.

Yet defining temporary, much like defining transitory, proves subjective. We anticipate growth reaccelerating toward the end of the year as the global economy moves past Delta, vaccinations continue, consumers look to spend during the holiday season, and supply disruptions slowly abate. While we are not discounting the impact of more durable problems such as the labor shortage, temporary factors produced most of the disruption to growth in the third quarter. Moving past those should produce another robust quarter of growth to close out 2021. Consequently, we see only a modest decrease in global growth in 2021, likely in the 5.5% to 6% range, and still forecast the strongest rate of growth in at least 40 years. 

Government policy

Government policy, broadly supportive of the economy during the crisis, appears set for change in three important ways. First, fiscal stimulus appears increasingly less necessary as vaccination progress around the world moves closer to transitioning from something pandemic to something endemic. That largely means the expiration of existing emergency spending programs as opposed to more austere fiscal budgets. We do not foresee federal governments around the world repeating the mistake that some made during the previous business cycle when they implemented austerity measures that proved counterproductive to a global economy still finding its footing. Federal government spending should still provide some boost to growth, but less than occurred during the crisis. The U.S. remains a key wild card, with two large spending bills currently under consideration, including an infrastructure bill. As fading fiscal spending impacts the demand side of the economy, we expect relaxing strictures (associated with the abating pandemic) to positively impact the supply side of the economy. Second, as lockdowns, shutdowns and social distancing continue to occur less frequently, that should increase the ability of businesses to produce goods and services at closer to full capacity, boosting the supply side of the global economy in the process. 

Lastly, although it appears that some central banks are angling to change monetary policy, we still foresee it remaining broadly conducive to growth. Like the mistakes made by federal governments with austerity last cycle, central banks will likely seek to avoid tightening monetary policy too quicky as some did during the last business cycle. Too much tightening too quickly could slow economic growth, necessitate reversals in policy, and undermine confidence in central banks. Major central banks will look to tamp down quantitative easing (QE) programs by slowing the purchases of financial instruments, but not too quickly. They will continue intervening but a lower level of purchases. Only once that starts to occur and economies appear able to stand on their own will central banks begin to think of hiking policy rates. And once they do, we anticipate that rates should remain near historically low levels, supporting economic growth. 

Country-level view 

The outlook for major developed economies generally softened as the year progressed. Beyond the U.S., other major developed economies have also experienced some slowing, causing downward revision to our country-level and global outlooks. This generally stems from universal stresses – the ongoing pandemic, higher prices, a labor shortage and supply-chain disruptions. These have combined to produce moderate drag on economic growth and our global forecast reflects that. Nonetheless, we still anticipate strong economic growth across developed countries heading into the fourth quarter and closing out 2021.

Developing countries also faced pressure during the middle of year. The Delta variant caused havoc in some places, particularly those that are lagging in vaccination rates. That has resulted in quarantines that forced workers home and restrictions that forced the closure of factories and ports. It also pushed some consumers and businesses to refrain from, or at least decrease, economic engagement. Despite these issues, international trade volumes continue to generally trend upward, supporting many developing economies that derive more of their GDP from exports. As supply chain issues abate, additional boosts from exports could further support economic growth heading into 2022. 

Risks

The global outlook contains several important risks. The question around inflation appears to have shifted from “Is inflation transient?” to “How long is transient?” as the world adjusts to higher inflation. Although signs of tentative peaking appear in countries such as the U.S., in others inflation continues to tick higher. Thus far, higher inflation has not impeded growth, but if inflation remains at elevated levels for a period longer than “transient” it certainly could. The acute labor shortage presents a structural problem with no easy solution. Wage pressures should persist as companies continue to compete for talent. Interest rates remain low but should drift higher as real economic growth exerts upward pressure. If investors’ attitudes change and they begin demanding greater nominal yields to offset higher inflation, interest rates could exceed expectations, potentially dampening growth. And of course, the pandemic has not yet ended and will likely continue to present disruptions, particularly in the northern hemisphere heading into the colder winter months. Though the pandemic should prove less disruptive as more of the global population obtains immunity, the pandemic has certainly shown its ability to defy expectations and upend forecasts. 

|  Outlook and implication for the U.S. |

Despite these challenges the global economy stands ready to end the year with another solid quarter and head into 2022 with momentum. Because of different timelines for the administration of vaccines by country around the world, the economy did not experience synchronized growth. With most of the world heading for vaccination over the next six months (based on current projections), 2022 could produce the concerted global growth that 2021 did not, even as economic growth decelerates.

For the U.S. the disruptions demonstrate that even a domestically oriented economy must still grapple with issues arising in other parts of the world. Supply shortages are exacerbating inflation, restrictions on the movement of people reduces spending and labor flows, and of course the ability to import new variants remains a threat until more of the population obtains immunity. Yet the door swings both ways – robust global growth in late 2021 and 2022, particularly as more governments relax strictures, should help provide a boost to the U.S. economy and consequently the commercial real estate (CRE) market. Improving global GDP supports U.S. businesses, which can generate demand for office space and even apartment units as new jobs translate into new households. Freer movement of goods supports demand for industrial space and ultimately retail space, with U.S. consumers still sitting on dry powder that has not yet been spent. And as restrictions on the movement of people subside, that should bode well for hotel demand which has suffered in many markets with limited foreign tourism.