Economists downgrade outlook following higher inflation and lower real wages

By Jon Bragg

May 25 2022
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The vast majority of chief economists surveyed by the World Economic Forum believe inflation will be high or very high in the US and Europe this year.

Expectations of an economic recovery have been overshadowed by fears of lower economic activity, higher inflation and lower real wages in the year ahead, a new survey by the World Economic Forum (WEF) has found.

The survey of 24 global chief economists released at WEF’s annual meeting in Davos this week indicated that the war in Ukraine, new COVID-19 variants and associated supply shocks have underpinned expectations for high inflation in most regions globally during 2022.

About 96 per cent of the surveyed economists expect inflation will be high or very high in the United States this year, followed by 92 per cent for Europe and 86 per cent for Latin America.

Meanwhile, the East Asia and Pacific region, including Australia, is expected to fare slightly better with only 39 per cent of those surveyed citing high or very high inflation expectations, while 43 per cent had a moderate outlook for inflation in the region.

Alongside high inflation, 69 per cent of the economists said that average real wages would likely decline in advanced economies in the near term, rising to 90 per cent for low-income economies.

“We are at the cusp of a vicious cycle that could impact societies for years. The pandemic and war in Ukraine have fragmented the global economy and created far-reaching consequences that risk wiping out the gains of the last 30 years,” said WEF MD Saadia Zahidi.

“Leaders face difficult choices and trade-offs domestically when it comes to debt, inflation and investment. Yet business and government leaders must also recognise the absolute necessity of global cooperation to prevent economic misery and hunger for millions around the world.”

Most of the economists surveyed held a moderate outlook for economic activity this year in all regions except Europe, where activity is expected to be weak.

For the East Asia and Pacific region, 77 per cent had a moderate outlook, followed by 18 per cent with a strong outlook and only 5 per cent who had a weak outlook.

According to 46 per cent of those surveyed, the risks associated with higher inflation in advanced economies outweigh those associated with short-term contraction due to monetary tightening, while 27 per cent were uncertain and a further 27 per cent disagreed.

To offset increasing consumer prices, 54 per cent agreed that there would be energy price subsidies in advanced economies while 41 per cent believed there would be food price subsidies.

WEF also commissioned a separate survey on how residents of 11 countries were coping with the cost-of-living challenges.

A quarter of respondents said they were finding it quite difficult or very difficult to manage financially at present, ranging from 67 per cent of respondents in Turkey to 16 per cent for those in the United States.

Around 21 per cent of Australian respondents indicated they were finding it difficult or very difficult to manage financially, while 26 per cent said they were ‘just about getting by’, 34 per cent were ‘doing alright’ and 18 per cent were ‘living comfortably’.

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