The covid-19 pandemic sent the global economy into deep recession in 2020; global GDP contracted by 3.7% (at market exchange rates)—the worst outturn since the 1930s. Developed countries are now seeing a sharp economic recovery, and this will accelerate as immunisation rates continue to climb across the few developed countries that have yet to immunise the vast majority of their adult populations. The US leads the way, with an economy that bounced back strongly in the first half of 2021, fuelled by fiscal stimulus and a swift start to the vaccine rollout. The other two global economic powers, China and the euro zone, also posted strong growth rates in 2021.

Omicron could be a game-changer for the pandemic

The new Omicron variant of covid-19 could be a game-changer for the pandemic. Our baseline scenario is optimistic; it assumes that Omicron is more transmissible but less severe than Delta, and that three doses of the current vaccines offer solid protection against severe forms of covid-19. If this proves to be the case, Omicron’s impact on global growth will turn out to be negative but small for 2021, and the global economy will recover faster in 2022 than we currently expect. However, if Omicron proves to be as or more severe than Delta, the recovery will slow in 2022.

A sustained rise in inflation poses a risk to the global recovery

Inflation jumped in 2021 as the global economic recovery got under way; the pandemic disrupted supply chains, and commodities prices soared to record highs (we estimate that the prices of many industrial raw materials and agricultural inputs jumped by around a third). Supply-chain disruptions will last until mid-2022 at least, fuelling rises in industrial and consumer prices. However, we assume that inflation will edge down in 2022-25, and therefore expect interest rates to remain low during that period, keeping public debt servicing at manageable levels. A sustained rise in inflation is—alongside Omicron—one of the main risks to the global outlook.

Major central banks will soon start to tighten monetary policy

In a move to ensure that higher inflation expectations do not become entrenched, major central banks may respond by tightening monetary policy sooner and more quickly than investors are currently expecting, which could destabilise financial markets and emerging countries. The Federal Reserve (Fed, the US central bank) has already signalled that interest rates could rise as soon as mid-2022 (a timeline that we have incorporated into our baseline forecast). Benchmark US bond yields have also started to rise, and if this trend accelerates, it will push up debt-servicing costs, slowing the economic recovery.

Supply-side factors are weighing on global trade flows

The covid-19 pandemic had a huge impact on trade flows in 2020, with goods trade contracting by about 5% and services trade shrinking by about 20% (owing mainly to a drop in global tourist flows). Global goods trade volumes rebounded sharply in 2021, fuelled by recovering demand as economies reopened. However, supply-side factors are a risk. A global shortage of semiconductors, driven by a sharp rise in demand for electronics due to the shift to remote working, is disrupting production across many industries. In addition, covid-induced disruption to transport links has sent freight rates to record-high levels. The recovery in services trade will be slower; we do not expect tourism flows to recover to pre-coronavirus (2019) levels before late 2023 or early 2024.

Widespread immunisation will not be achieved until 2023 at the earliest

The pace of immunisation programmes will determine economic prospects in 2022 and beyond. December 2021 marked the first anniversary of the launch of the global vaccination campaign against covid-19. Raw data paint a positive picture: as at mid-December 2021 more than 8.4bn doses had been administered around the world. However, regional- and country-level figures tell a different story: some (mostly developed) countries have succeeded in vaccinating large percentages of their populations, but many (mostly developing) countries have made only negligible progress owing to production and logistical issues. We believe that countries that failed to vaccinate the bulk of their populations in 2021 are unlikely to do so before by 2023 (or ever).

The slow rollout of coronavirus vaccines poses a major risk to the recovery

The global divide regarding access to vaccines will have economic implications. First, it will weigh on the global recovery: rich countries will be able to lift social distancing measures, while poorer ones continue to battle against the pandemic. Second, this situation will continue to weigh on tourism, with some vaccinated people reluctant to travel to unvaccinated places. Third, continued circulation of the virus increases the risk that more aggressive variants emerge, as the apparition of the Omicron variant illustrates. If these prove even partly resistant to vaccines, they could wipe out progress in containing the pandemic and further delay the recovery. The virus will remain prevalent for several years in an endemic form, making living with covid-19 the new normal.

For an in-depth look at the global vaccination rollout in 2021, download our latest whitepaper: One year on: vaccination successes and failures