Above all, it was the year of inflation.
The cost of living soared all over the world in 2022. Pandemic price pressures, dismissed as transitory, turned out to be enduring with Russia’s war in Ukraine causing a fresh spike in food and energy costs.
In June alone, inflation was mentioned in more than 250,000 news stories on the Bloomberg Terminal.
Initially slow to react, the Federal Reserve and its fellow central banks were forced to play catch-up. They raised interest rates at the fastest pace in decades.
By the year’s end, inflation appeared to be past its peak – but economies were stalling, as tight money began to bite.
While, still-tight labor markets have provided some support, recession risks are mounting into 2023 for some of the world’s major economies, including the US and Europe.
The coming months are expected to see more rate increases – and a cooling in inflation, though perhaps not by as much as central banks would like. Next year is likely to turn tougher for workers, with unemployment forecast to rise.
The following charts highlight some of the key developments in the global economy over the past year.
The global surge in inflation led to double-digit price increases in some industrial economies. Economists reckon it was driven by a combination of pandemic disruptions to supply chains and labor markets, commodity spikes after Russia’s invasion of Ukraine, and government stimulus that shored up consumer spending.
Central banks responded to high inflation with rapid interest-rate hikes to cool their economies, ending an era of cheap money in the developed world. Most of the major banks say there’s more to come. “We are not at a sufficiently restrictive policy stance yet,” Federal Reserve Chair Jerome Powell said at his last press conference of the year. “We will stay the course until the job is done.”
With household spending under pressure from the soaring cost of living, and higher interest rates starting to have an impact, pandemic recoveries lost momentum in 2022 – and next year will likely be even worse. The International Monetary Fund is forecasting an extended period of sub-par growth for the world economy.
Russia’s invasion of Ukraine in February, and the sweeping sanctions against Moscow that followed, set off a surge in the prices of key commodities from oil to wheat. Poor countries dependent on food and energy imports – like Sri Lanka, which was forced to default on debt – were hit especially hard. Europe, which had relied on Russian pipelines before the war, saw the cost of natural gas and electricity spiral to record highs. By the year’s end, many of these prices had retreated.
As the Fed raised interest rates at a rapid clip, the US dollar posted its biggest advance in years – easing some of the inflationary pressures at home, but adding to them elsewhere. The greenback gave up some of the gains in the closing months of 2022.
Some emerging economies were tipped into debt trouble by the combined effect of soaring import bills, higher borrowing costs, and a strong dollar. Global lenders estimated that more than half of the developing world is either already in debt distress, or close to it. As governments from Egypt to Pakistan sought help, the International Monetary Fund was poised to break its lending record in 2022.
The worldwide snarl-up in supply chains that was brought on by the pandemic – as factories shut down and transit routes suffered from bottlenecks – eased significantly this year. That offers hope for better trade conditions and fewer price pressures next year – although one big unknown is the prospect for the world’s manufacturing powerhouse China after it dropped its Covid Zero policy.
One surprise has been the resilience of labor markets worldwide. The US, for example, recorded an unemployment rate of just 3.7% in November. A headache for central bankers is this is fueling higher wages with workers increasingly seeking more pay to offset the inflation spike, in turn risking a wage-price spiral as companies seek to compensate for the higher employment costs. Strikes are also more prevalent.
After a run-up during the pandemic, house prices in some countries turned downward in 2022 – and many analysts expect a broader housing bust next year, as high interest rates make mortgages expensive. That’s a risk for economic growth, which typically benefits from a so-called wealth effect when homeowners feel richer in a booming market – and suffers when the opposite conditions take hold.
One striking feature of the world economy at the end of 2022 is the difficulty of seeing what’s coming next. In the period from the arrival of Covid to the Russian invasion of Ukraine, a much-cited gauge of policy uncertainty has been at the highest levels on record.
That suggests caution is in order for anyone trying to figure out how the past year’s trends will extend into 2023.
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