Executive summary
Russian military actions in Ukraine have transformed the world. In both geopolitical and economic terms, the conflict marks a historic inflection point—yet the ultimate outcome remains highly volatile and uncertain. We anticipate the conflict will result in an array of both direct and second-order effects. Sanctions are severely hitting the Russian economy, disrupting financial flows, causing the value of the ruble to plummet, and sparking a banking crisis. At the global level, oil and gas prices have reached their highest levels since the 1970s and wheat prices are surpassing highs predating the First World War. This commodity volatility is feeding into the global economy, with fuel and food prices hitting consumers and exacerbating inflation that was already running at 40-year highs prior to the onset of the conflict. As Russia and Ukraine produce roughly 10 percent of all traded foodstuff, the disruptions to food supply and production will have a significant impact. Wheat and vegetable oil supplies will be strained, yielding higher costs, and disruptions to supplies of fertilizer will impact future crop yields.
The implications of the military actions in Ukraine have already been made plain in the projections for overall global output. Days before the start of the conflict, we were anticipating baseline global output growth of 4.0 percent in the year ahead—a decline from the striking 6.0 percent growth the world experienced in 2021 but strong nonetheless. At the time of this writing, just a few weeks later, we now anticipate baseline growth of 3.4 percent, shaving off the equivalent of nearly $480 billion in projected global output for 2022 alone. We then anticipate growth will continue to slow—to 3.2 percent in both 2023 and 2024. And, crucially, this is simply our baseline projection. As our scenario analysis explores, much hinges on the duration and trajectory of the conflict. The outcome of what happens in Ukraine, along with a confluence of other factors, will dramatically impact the size and nature of the global economy by 2024.
While what happens in Russia and Ukraine has the potential to reshape the global operating environment, it is far from the only factor at play. The Omicron variant appears to be receding in most major economies at the time of this writing, but the threat of pandemic disruptions remains. Lest we forget, it was roughly one year ago that the rapid development of effective vaccines and therapeutics and ongoing vaccination programs indicated that the pandemic might soon be a thing of the past. The experiences of Delta, followed by Omicron, have since suggested that such optimism was premature.
Although the outlook has changed since the onset of COVID-19 and the Russian military actions in Ukraine, some of the key pre-pandemic features of the global economy remain. The first of these is the divergence of growth across regions. The Asia and Australasia region was the principal source of economic dynamism before the pandemic. It is again now. Second, many of the national economies that were driving the global economy before COVID-19 have reemerged as leaders. Before the pandemic, India and China were enjoying significant economic expansion. The same holds true now, though output rates for both economies are comparatively less impressive. Our baseline projections suggest their three-year outlooks will average 6.6 and 5.2 percent growth, respectively. Although the United States will expand at a comparatively slower average rate of 2.4 percent over the next three years, this is still faster than its pre-pandemic rate of 2.3 percent in 2019. It will also remain the world’s largest economy through 2024 and serve as a major engine of global growth throughout the forecast period.
Of course, much has changed, and much is still changing. The prevailing uncertainties—ranging from a sharp rise in geopolitical risk to the acute short-term and longer-range macroeconomic unknowns—are nothing short of staggering. All this makes a three-year forecast of this nature nearly impossible. As a result, we have superimposed a scenario framework on our analysis. The goal is to develop alternative visions of the future that are both plausible and compelling.
Embedded in this scenario framework are five factors that individually and together will go a long way in determining how the short- to medium-term economic future will unfold:
The course of the conflict in Ukraine. A short or protracted conflict? Occupation or withdrawal? At the time of this writing, the Russian military action in Ukraine is still under way but is already having ripple effects for international security and the global economy. As extensive sanctions and countersanctions are being imposed and the risk of escalation remains, the total costs of this conflict—in human and economic terms—could be extraordinary.
The trajectory of COVID-19. Is a full recovery from the pandemic even possible? The emergence of the Delta, Omicron, and now BA.2 variants certainly cast a long shadow on this assumption. Therefore, the question arises: What would an endemic COVID-19 mean for the economic outlook and, indeed, for society at large? And what might the emergence of other new menacing variants mean?
The rate of supply chain recovery. The combination of high consumer demand and pandemic-driven worker attrition for manufacturers and suppliers is proving extremely disruptive. When will this situation improve? Or should we be thinking in entirely different terms?
The extent to which inflation is persistent or transitory (or both). Already-high levels of inflation have been exacerbated by the conflict in Ukraine. Interest rate rises may well reduce (or reduce rises in) the rapid increases in inflation, but risk creating drags on the stock market and reducing investments overall, which will slow growth.
US–China relations. Trade war and hostile rhetoric, a reversion to traditional bilateral trade patterns, or somewhere in between? Sino-American relations will shape both the short-term and longer-range global economic outlook and the very structure of the global economy.
To understand the range of these competing futures for the global economy and the different ways in which permutations of these five factors could unfold and interact, our Global Economic Outlook 2022–2024 explores four distinct alternative scenarios:
The Great Stagnation
The world struggles to get back on track from the disruptions brought about by COVID-19 while the conflict in Ukraine proves to be protracted. US–China relations deteriorate to unprecedented lows. Amid persistent supply chain disruptions (exacerbated by extensive global sanctions), high commodity prices, and record inflation, growth falls well below baseline projections, averaging 2.0 percent over the forecast period.
A World Transformed
The global economy undergoes sizable changes as a result of the pandemic and the return of great power geopolitics. Concerted efforts are made to reshore manufacturing and shorten supply chains, reshaping business models and fundamentally remaking global value chains. While these changes are not without growing pains and as projected growth falls short of baseline levels, averaging 2.7 percent over the forecast period, there are indications by 2024 that recovery is fast approaching.
Powering Through
The global economy rebounds despite continuing pandemic challenges and a tenuous cessation of hostilities in Ukraine. Key allied governments recommit to trade liberalization and strengthening supply chains even while geopolitical tensions simmer, especially between Washington, D.C., and Beijing. Growth is above baseline levels, averaging 3.8 percent over the forecast period, but some indicators point toward a fragile recovery.
The Great Recovery
The global economic rebound is swift and pronounced as the pandemic recedes in the wake of Omicron and violence rapidly de-escalates in Ukraine. The combination of recovery, a resurgence of global trade, and a decline in geopolitical tensions all contribute to stronger-than-expected economic growth. Growth averages 4.2 percent over the forecast period.
These scenarios, of course, are not predictions. Rather, they are plausible alternative futures against which leaders must now plan. Putting risk preparedness plans in place to account for global economic shifts will be essential. In addition, companies with a strategic mindset will build on lessons learned during the pandemic and stay proactive in pursuing and achieving future objectives—from strengthening their supply chains to executing new mergers and acquisitions and acquiring new talent. Companies that lean into the opportunities created by uncertainty—while building the capacity to make swift adjustments as the operating environment changes—will gain an outsized advantage.
Where are we now?
Despite the setbacks caused by the Delta and Omicron variants, 2021 was a year of economic recovery. Global economic output rounded out to 6.0 percent in 2021, representing a significant rebound from a 3.4 percent contraction in 2020. While we expected growth to slow in 2022, the conflict in Ukraine and Omicron-related lockdowns in the first three months of the year have curbed our projections even more. We now anticipate global output of 3.4 percent this year, down from a forecast of 4.0 percent in early February and from the 4.8 percent annual growth we projected in late September, pre-Omicron. Growth will drop further to 3.2 percent in both 2023 and 2024 (see figure 1).
To be sure, the beginning of the year has set back expectations of recovery. Stock markets in advanced economies have dropped, in some cases precipitously, as a result of the dislocations generated by the enduring pandemic and the conflict in Ukraine. Compounding this challenge, the great shortage of supplies and workers and rising inflationary pressures in key economies are persisting, at least in the short term. As forced quarantines and school closures have resulted in more workers, especially women, leaving their jobs, global unemployment is projected to hover at 5.7 percent this year, declining slightly to 5.3 and 5.0 percent in the next two years, respectively. In addition, the Russian military activity in Ukraine is the latest indicator of the return of great power geopolitics and a profound source of uncertainty for the global economy.
Given these headwinds, how will the global economy change in the next three years? The outlook is mixed. The duration and extent of the conflict in Ukraine remains a major wildcard, and the risk of another COVID variant causing more economic disruption remains. And ongoing structural issues could slow growth even more.
Inflation will rise in the early stages of 2022 on the back of strong consumer demand, rising oil and gas prices, and continuing supply chain troubles. Current projections suggest this situation will stabilize, but not until the latter half of 2023, as supply chain issues improve and central banks take action, namely by raising interest rates (see figure 2). The US Federal Reserve, for example, already raised interest rates in mid-March 2022, and is poised to continue increasing them. And in the UK, the Bank of England raised interest rates for the third consecutive time in March. We expect the combination of the higher cost of capital, surging commodities prices, and obstinate supply chain challenges, which are also likely to endure through 2022, to put downward pressure on economic growth for the duration of our three-year forecast period.
Regional and country-level projections
Our regional analysis finds that Asia and Australasia will continue to lead the world in output over the next three years, averaging 4.6 percent growth (see figure 3). India and China will lead growth in Asia, with respective average growth rates of 6.6 and 5.2 percent between 2022 and 2024. India’s growth will be driven by improvements to credit and, in turn, investment and consumption as the financial sector strengthens. China’s growth is expected to fall to 4.8 percent this year—still robust, but a notable decline from 8.8 percent in 2021. Weakness in construction and property sales, along with the potential for new lockdowns, are key contributors to this decline. Further, China’s “COVID zero” policy appears to be increasing the country’s dependence on exports, making it more vulnerable to shifts in tariffs and trade policy.
The Americas along with the Europe and Eurasia regions are projected to have comparatively lower output over the next three years, with respective average growth rates of just 2.4 and 2.1 percent. Owing to continuing labor and supply shortages, we project the three-year average growth rate in the United States to be just 2.4 percent, in line with the corresponding regional average, with growth projected to fall from 3.2 percent in 2022 before leveling off at 2.0 percent in each of the next two years. Despite these modest growth projections, the United States is still expected to power much of the post-pandemic economic recovery and will remain the world’s largest economy throughout the forecast period. Canada will see similar patterns in growth levels, falling from 3.9 percent in 2022 to 2.5 and 1.9 percent in 2023 and 2024, respectively. Though the country’s labor markets have largely recovered from the pandemic, productivity is still a concern.
In Europe, the continued economic uncertainties surrounding the conflict taking place in Ukraine will dampen the region’s economic outlook for the foreseeable future, especially as commodity prices are likely to remain high, at least in the short term. The United Kingdom is projected to see growth drop from 3.8 percent in 2022 to 1.8 percent in 2023 and 2.1 percent in 2024. Output projections for Germany have also declined since late February, with growth now estimated at 2.1 percent in 2022 (down from 3.5 percent previously). German growth is anticipated to then rise to 3.2 percent in 2023 before declining to 2.3 percent in 2024 as the economy continues to confront supply chain disruptions and fallout from the crisis in Ukraine. Without question, however, the Russian economy is experiencing the most dramatic headwinds as sanctions take effect. In February, Russia was projected to grow at 3.2 percent in 2022, followed by 2.9 and 2.0 percent growth in the subsequent two years, averaging 2.7 percent growth over the forecast period. As of this writing, the outlook has dimmed dramatically. The Russian economy is now projected to contract 10.3 percent in 2022. In 2023, the economy will continue to contract at 3.4 percent, before returning to low growth of 2.1 percent in 2024. The country will average -3.9 percent over the forecast period.
The Middle East and Africa will have a healthy growth rate of 3.4 percent between 2022 and 2024. Fueling the Middle East’s dynamism will be a continued COVID-19 vaccination rollout across the region to counter potential upcoming waves of infections along with high energy prices and rising oil production. The United Arab Emirates is projecting strong average growth of 5.4 percent over the next three years, bolstered by institutional reforms to promote trade and investment and improve the ease of doing business in the country. Within Africa, there will be some bright spots as debt levels remain stable. Nigeria has seen notable growth in cultural industries, including music, film, and fashion, even while growth in the country’s large oil sector has slowed. Nevertheless, continued slow vaccine rollouts and the potential for extreme weather events will weigh on the region’s recovery.
Five factors to watch
Over the next three years, a few factors could have an outsized impact on the direction of the global economy. Although a large constellation of forces is shaping the economic outlook, we believe these five elements will bound the possibilities for which leaders should prepare:
The Ukrainian conflict. In addition to the human cost, the conflict in Europe has major implications for the global economy, and much uncertainty remains around its duration and outcome. Already, prices of major commodities, including oil, gas, and wheat, are surging in large part due to the conflict, exacerbating already-high levels of inflation. Costly sanctions have been imposed on Russia, taking a toll on the country and the global economy overall. The risk of escalation remains high, including the potential for unprecedented cyberattacks targeting governments and businesses alike. Second-order effects could also be significant. Ukraine is the world’s fifth-largest wheat exporter, serving many already food-insecure nations from Lebanon to Bangladesh. Soaring food prices or roadblocks for wheat exports could easily increase global hunger and result in political unrest elsewhere in the world.
Lasting COVID. There is a growing consensus that COVID is here to stay. But what will that mean for the economy and, indeed, for society at large? That all depends on the virulence of new variants as well as how governments, businesses, and workers decide to address them. A more transmissible, less deadly variant may be good news from a health standpoint, but its economic toll could still be high. Frequent labor absences, as the Omicron variant has made painfully clear, reduce productivity and hinder growth.
Supply chain recovery. At present and for the foreseeable future, supply chain dislocations are creating a profound drag on the global economy and are being complicated by the ongoing conflict in Ukraine. Rising consumer demand post-Omicron will intensify these challenges. As manufacturers and suppliers continue to see worker absences and attrition, orders simply cannot be filled. When will this situation improve? Predictions range from late 2022 or early 2023 to even later. Until the great shortage ends, global growth will face continued headwinds. The key question, therefore, is how long it will take supply chain systems to normalize.
Level of inflation. While inflation may ultimately prove to be transitory, its impacts are far from it. Consumers are suffering as prices reach 40-year highs, and surging oil and gas prices are set to exacerbate this challenge. Perception will be one key factor in how long this high inflation lasts. If there is a widespread perception that inflation will remain high, workers will demand higher wages, and businesses will in turn pass along their higher costs to their customers. And the extent to which monetary policy in major economies is adjusted remains uncertain. Early indications suggest interest rate rises are imminent, which may well reduce inflation while also creating drags on the stock market and reducing investments overall, slowing growth.
US–China relations. Growing tensions between Beijing and Washington—whether as a result of geopolitical rivalry, trade tensions, or territorial disputes—have significant economic implications. They have weakened the global responses to COVID-19 and climate change and show little sign of improving. How relations unfold over the next few years will shape the global economic outlook and the architecture of the global economy. Will free trade regain momentum? Or will the global economy be increasingly defined by protectionism and economic spheres of influence?
Where might we be going?
In our scenarios, we discuss four plausible yet divergent paths that the global economy could take over the next three years. While these are not predictions, they represent futures that could come to fruition—depending on how the five factors above unfold. Two primary drivers form the architecture of these scenarios, each selected because of their high impact, high uncertainty, and mutual independence from one another (see figure 4). The first, the level of global openness, measures the extent of localization in the world, ranging from modest localization requirements to more dramatic levels of protectionism. The second, the level of pandemic recovery/global hostilities, measures the extent to which the world can move beyond the pandemic and current geopolitical hostilities, ranging from a swift end to both in 2022 to a protracted crisis on both fronts, including new variants and escalating conflict.
Scenario 1: The Great Recovery
Sustained public health/reduced hostilities; a more open world and less localization
In the Great Recovery, the global economic rebound is swift and pronounced following a rapid de-escalation of geopolitical tensions and a receding pandemic (see figure 7). The global economy reaches 4.6 percent output in 2022 and maintains 3.2 percent output over the subsequent two years. Successful negotiations between Moscow and Kyiv result in a cessation of hostilities and Russia’s decision to reverse course and pull back troops from Ukraine in 2022. The risks of the conflict escalating in and beyond Ukraine appear, at least in the short term, to have been diminished.
Alongside these geopolitical shifts, COVID-19 becomes endemic. The virus becomes more manageable thanks to a combination of improved treatment capabilities, vaccine dissemination and uptake, advances in therapeutics, and improved global cooperation in confronting the crisis. The result of this development, alongside the cessation of violence in Europe, is a cascade of tailwinds for the global economy. Consumer spending rises as confidence grows that economic shutdowns and labor-force disruptions are firmly in the rearview mirror.
The supply chain dislocations that defined much of 2021 and 2022 also steadily disappear amid the broad-based economic recovery. Companies apply lessons learned from the experience of the disruption to strengthen their logistics, making them more robust in the face of future shocks. Inflation persists to some degree amid high growth but is less disruptive as supply chains stabilize and supply-demand balances are restored. Expansionary monetary policies in the United States, Europe, and elsewhere are no longer being deployed.
Trade flows recover in this environment, particularly as both Beijing and Washington step back from the confrontational rhetoric that defined their relations in recent years. Talk of trade wars fades. Other developments take longer than expected to stabilize on the world stage. In addition to lingering inflation, labor costs remain high, and competition for talent remains fierce. Nevertheless, a recovering global economy built on strengthening trade flows suggests that the economic outlook is normalizing after years of pandemic disruption.
Scenario 2: Powering Through
Persistent pandemic/rising hostilities; a more open world and less localization
In Powering Through, the global economy rebounds despite persistent pandemic challenges and a tenuous peace in Ukraine (see figure 8). The economy reaches and maintains 3.7 percent growth in 2022, before rising to 4.1 percent in 2023 and then falling again to 3.6 percent in 2024. Although Russian and Ukrainian leaders reach a truce to stop active fighting in 2022, neither side is fully satisfied with the terms. Lower levels of violence continue to erupt intermittently in the years that follow but fall short of the scale witnessed in the first weeks of the conflict. Some sanctions are lifted to encourage de-escalation, and the commodities prices slowly fall with them.
While new COVID variants continue to emerge and spread throughout the world, they tend to be less deadly, resulting in fewer shutdowns and supply chain disruptions. Several economies move to jumpstart growth despite the lingering pandemic through policies to promote the free flow of labor, goods, and services. Intermittent supply chain disruptions still occur but generally improve from the severe disruptions of 2021.
In tandem, falling commodity prices amid increased trade and moderate consumer demand serve to bring inflation down from its peak in Q2 2022. Labor and other input costs fall for businesses, but significant vulnerabilities in the global economy remain unaddressed. The risk of US–China economic decoupling is rising as geopolitical tensions between the two countries escalate while protectionist sentiments continue to simmer under the surface in major economies and threaten to boil over in unprecedented fashion. And the risk that Russia may reignite a major—and more widespread—conflict in Europe remains. The global economy is powering through a slow pandemic recovery, but geopolitical volatility is rising, and questions remain as to how long the present course can be sustained.
Scenario 3: The Great Stagnation
Persistent pandemic/rising hostilities; less open world and more localization
In the Great Stagnation, the world struggles to get back on track from the disruptions brought about by COVID-19 and the economic effects of the conflict in Ukraine (see figure 9). Growth falls to 2.3 percent in 2022 and drops to 1.8 percent in 2023 before recovering slightly to 2.0 percent in 2024. The pandemic persists to varying degrees in countries around the world, with intermittent waves of outbreaks brought about by new variants. These developments sometimes result in new lockdowns and supply chain disruptions, creating a Groundhog Day sensation and an overall atmosphere of economic pessimism.
Efforts to bolster domestic self-sufficiency by shortening supply chains and building up domestic capacity in key industries soon transform into outright protectionism in an atmosphere of growing geopolitical volatility and populist backlash against trade and all things foreign. These developments take place against a backdrop of increasingly hostile rhetoric between the United States and China and in the aftermath of full-scale military action in Ukraine. Beyond a significant human cost, the conflict in Europe has ripple effects that extend beyond the continent, including spikes in oil, gas, and food prices that drive persistent inflation despite weak economic growth amid sanctions, countersanctions, and unprecedented waves of cyberattacks targeting governments and major businesses alike. While the fighting has largely been contained to Ukraine, the risks of an expanded conflict persist. Global trade and FDI flows decline, as does the free flow of labor.
Actions to foster economic growth with expansionary monetary policies in key economies succeed in increasing consumer demand but have the downside effect of compounding inflation, particularly when supply chain disruptions reoccur. While economists note that a cyclical recovery could be on the horizon, these sources of strain have combined to take a perilous toll on the global economy by 2024.
Scenario 4: A World Transformed
Sustained public health/reduced hostilities; less open world and more localization
In A World Transformed, the global economy undergoes profound changes as a result of the pandemic experience and the return of great power geopolitics (see figure 10). Global output growth falls to 2.9 percent in 2022 and drops to 2.5 percent in 2023 before rebounding to 2.8 percent growth in 2024. While the acute threat of COVID-19 recedes in 2022 as herd immunity is reached in many economies following the extensive spread of the Omicron variant, the legacy of the pandemic is profound. Industrial policies and efforts to build self-sufficiency are supercharged by the experience, with leaders in major economies vowing to never again let their countries be exposed to the risks of global supply chains.
Localization is the order of the day, with governments strategically investing in vital industries and working to build capable domestic workforces. The results are uneven and painful at times, often resulting in short-term economic hardship. As supply chains are remade, there are noteworthy disruptions, and levels of trade fall overall, yielding higher costs to consumers. Yet despite these developments and slowing growth, there are reasons for optimism. Once established, shorter supply chains prove to be robust, with greater efficiencies enabled by AI and other new technologies. Inflation falls relatively quickly as consumer demand is reduced in an atmosphere of lower growth, reducing labor and input costs for businesses.
US–China relations mirror these economic shifts: both countries focus on strengthening geopolitical and economic ties in their respective regions. Bilateral trade between the two countries declines, but hostile rhetoric and the risk of overt conflict appear to be receding. Tensions between the West and Russia remain, even as the country has largely withdrawn from the international system following its costly military action in Ukraine. Strong international backlash tempered the duration of the conflict, but the geopolitical and economic effects were transformational and, in many ways, marked the end of globalization as it had been before. Overall, these geopolitical and economic shifts have been painful, and the global economy has contended with some serious blows. Nevertheless, signs of recovery in 2023 reflect some growing hope that such changes can ultimately herald a brighter economic future.
Conclusion and business implications
Uncertainty is unnerving for business leaders. But they have learned to live with it—and adapt to it—especially in the pandemic conditions of the past two years. While unpredictability will remain, understanding the above factors and scenarios can help government and business executives better anticipate and plan for the economic futures that might occur.
The five factors we identified—and how they interact with one another—have the capacity to change the global economic architecture. Therefore, putting risk preparedness plans in place to account for global economic shocks such as additional supply chain disruptions, geopolitical friction, continued inflation, and lasting COVID will be key. Building on their experiences of the past two years, companies with a strategic mindset will stay proactive in pursuing their targets, from acquiring talent to new mergers and acquisitions.
More specifically, five business implications should be top of mind:
Prioritize risk preparedness. Operational resiliency will be the name of the game for companies over the next few years. To minimize the uncertainty shrouding the global economic architecture, businesses should ensure that they have robust risk preparedness and management programs in place. This means preparing for everything from minor inconveniences such as shipping delay times to worst-case scenarios ranging from another pandemic to a major conflict.
Expect exchange rate volatility. Record-high inflation could impact exchange rates. Low inflation and interest rates helped to deter swings in exchange rates over the past decade, but as consumer prices and interest rates go up, currency volatility could make a comeback. Businesses with extensive international operations should be prepared for higher costs of doing business. To mitigate such risks, companies can encourage early payment by customers and use forward contracts, among other initiatives.
Prepare for rising interest rates. Interest-sensitive businesses, such as those in the mortgage industry, will be confronted with less demand for their goods and services. Companies can also expect to see higher borrowing costs for both operating lines and term loans. To prepare for these realities, strategic businesses will seek to reduce costs in ways that minimize harm to the bottom line. This can include several key steps, from having clear visibility on their spending to reducing consumption and even boosting automation.
Plan for endemic COVID. As the likelihood of endemic COVID grows, businesses will need to adapt. This could mean embracing permanent remote work to redesigning office spaces to reduce virus spread. Creating in-office vaccination booster programs, requiring mask wearing in offices if and when COVID becomes more seasonal, and requiring employees to stay home when ill are other initiatives that companies might take if COVID becomes a permanent fixture in our lives.
Be ready to reassess supply chains. From pushing for greater localization of manufacturing operations to boosting the use of technology to improve productivity, companies are streamlining their supply chains to alleviate product shortages and increase efficiency. Doing so will only become more urgent over the next few years as geopolitical risks and economic issues converge to create more pressure on international trade and operations.
The authors would like to thank Terry Toland and Gabriella Huddart for their valuable contributions to this report.
Authors
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