economic #aGENda 17.01

Global growth expected to slow in 2022

Following a strong rebound in 2021, the global economy is entering a pronounced slowdown amid fresh threats from COVID-19 variants and a rise in inflation, debt, and income inequality that could endanger the recovery in emerging and developing economies, according to the World Bank’s latest Global Economic Prospects report.

Global growth is expected to decelerate markedly from 5.5% in 2021 to 4.1% in 2022 and 3.2 percent in 2023 as pent-up demand dissipates and as fiscal and monetary support is unwound across the world.

The rapid spread of the Omicron variant indicates that the pandemic will likely continue to disrupt economic activity in the near term. In addition, a notable deceleration in major economies - including the United States and China - will weigh on external demand in emerging and developing economies.

At a time when governments in many developing economies lack the policy space to support activity if needed, new COVID-19 outbreaks, persistent supply-chain bottlenecks and inflationary pressures, and elevated financial vulnerabilities in large swaths of the world could increase the risk of a hard landing.

The slowdown will coincide with a widening divergence in growth rates between advanced economies and emerging and developing economies.

Growth in advanced economies is expected to decline from 5% in 2021 to 3.8% in 2022 and 2.3% in 2023 - a pace that, while moderating, will be sufficient to restore output and investment to their pre-pandemic trend in these economies. In emerging and developing economies, however, growth is expected to drop from 6.3% in 2021 to 4.6% in 2022 and 4.4% in 2023.

By 2023, all advanced economies will have achieved a full output recovery; yet output in emerging and developing economies will remain 4% below its pre-pandemic trend. For many vulnerable economies, the setback is even larger: output of fragile and conflict-affected economies will be 7.5% below its pre-pandemic trend, and output of small island states will be 8.5% below.

Meanwhile, rising inflation - which hits low-income workers particularly hard - is constraining monetary policy. Globally and in advanced economies, inflation is running at the highest rates since 2008. In emerging market and developing economies, it has reached its highest rate since 2011. Many emerging and developing economies are withdrawing policy support to contain inflationary pressures - well before the recovery is complete.

US Inflation hits 7%

President Joe Biden has attempted to play down a new annual inflation reading of 7%, the highest level in 40 years, by branding it a 'global' issue that his administration is making 'progress' with.

Persistent supply chain issues have left grocery shelves bare across the nation this week, drawing comparisons to conditions in the former Soviet Union and putting further upward pressure on prices. The Labour Department said on Wednesday that the consumer price index rose 0.5% last month after surging 0.8% in November, with Biden apparently trying to highlight that slowing rate of growth as an achievement.

That increase pushed annual inflation to 7% in December, which is the highest level since June 1982, and up from November's 6.8% annual rate. In a statement, Biden called inflation 'a global challenge' and claimed the latest numbers were good news, showing the monthly rate of price increases slowed in December from the prior month.

Help to buy has pushed house prices up

Lastly, back to Blighty, and the Government's Help to Buy scheme has inflated house prices in England, according to a House of Lords report.

In summary, The Help to Buy Equity Loan scheme is a Government loan towards the cost of buying a new-build home as a first-time buyer. You can then borrow an equity loan to cover from 5% and up to 20% of the property purchase price of your newly built home, however if the property is in London, you can borrow up to 40%!

There is no interest to pay on this loan for the first 5 years and then from year 6 that rate is 1.75%, increasing by CPI.

The scheme will have cost around £29 billion by the time it comes to an end in 2023, according to the report by the Lords' built environment committee. It said that this did not provide 'good value for money' for the taxpayer.

In particular, it claimed that the value of homes in more expensive areas had been pushed up by 'more than the subsidy value' – meaning that home buyers would have paid less for their properties had the scheme not existed.

This suggests that housebuilders charged more for their Help to Buy-eligible homes, knowing that buyers would be able to borrow 20% of the purchase price from the government, interest-free for five years.

The report said the money would have been better spent on building more homes instead. If there are more homes available to buy, this can decrease house prices as supply and demand become more evenly balanced.

Evidence suggests that, particularly in areas where help is most needed, these schemes inflate prices by more than their subsidy value, the report said. In the long term, funding for home ownership schemes do not provide good value for money, which would be better spent on increasing housing supply.

While the report may claim it is not good value for the taxpayer, I think the scheme is fantastic for youngers buyers who would struggle to get onto the housing ladder otherwise. Perhaps the “Lords” who undertook the report are having trouble letting their property portfolio as potential renters are moving into homes of their own?