Insight

Global Debt Outlook - 2022

January 4, 2022
Hemant Baijal
Hemant Baijal
Head of Invesco Fixed Income Multi-Sector Portfolio Management and Global Debt Team
global-debt-outlook-2022
Overview
1
Financial markets have been dominated by market technical soften at odds with macro fundamentals. While the global growth story continues to evolve, extraordinary monetary and fiscal policies enacted over the past 18 months have created enough distortions to allow this incongruent price action to last longer than it would have under normal conditions.
2
Forces driving current inflation are tied to supply-side bottlenecks in a period of global excess demand. Yet for inflation to be persistent, we believe fiscal policy in the US and developed markets globally would need to be engaged over the next two to three years – if anything, we expect it to wane significantly.
3
We believe the factors contributing to US dollar strength are now behind us, and broad conditions for emerging market relative and absolute performance over a three-year investment horizon are currently falling into place.

Macro fundamentals vs market technicals

Over the past four months, financial markets have been dominated by market technicals – specifically, strong investment flows – that have often been at odds with macro fundamentals. While the global growth story continues to evolve, extraordinary monetary and fiscal policies enacted over the past 18 months have created enough distortions to allow this incongruent price action to last longer than it would have under normal conditions.

Macro backdrop

While the macro backdrop has evolved over the past six months, it remains consistent with a global economy that is growing above potential, supported by still very easy financial conditions, though facing some growing headwinds. The primary change in the macro backdrop concerns inflation, which was assumed to be purely transitory but is shaping up to be more persistent than expected, if still temporary. It is possible that, longer-term, the deflationary regime from the last decade has ended.

On the heels of extraordinary stimulus, supply chain constraints and (to a lesser extent) the ongoing global pandemic have emerged as the two primary forces shaping global economic growth. When combined with inflationary headwinds, our estimate for 2021 global growth has now fallen to 5.3% and 4.0% for 2022. The rapid normalization of monetary policy in emerging markets is expected to drag growth lower from prior estimates, but we still expect emerging market growth to remain higher than in developed economies. The monetary adjustments in Latin America are expected to be the primary cause for the growth drag in emerging markets. Ultimately, we anticipate a global growth trajectory that is flatter overall, but likely to remain higher for longer.

Download PDF

Related Articles