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Deloitte: shortages drive slowdown but growth will continue

Author: ICAEW Insights

Published: 17 Sep 2021

While the momentum of the global economic recovery has slowed, businesses and financial markets are still positioning themselves for growth in 2022, according to Deloitte’s Chief Economist.

Following the sustained economic growth seen in spring and early summer, some slowdown was inevitable and necessary, given that no economy could sustain the sort of bounce-back rates of growth seen in 2021, the slowdown has come rather faster than expected, according to Ian Stewart, Partner and Chief Economist at Deloitte.

In its annual ‘Back to School’ webinar on global economic outlook, the Big Four firm pointed to the Delta variant, supply shortages and recruitment difficulties weighing on activity over the past few months.

“The world’s largest carmaker, Toyota, has had to cut global production by 40% this month in response to shortages of semiconductors. Such shortages have pushed inflation above central banks’ target rates in the US, euro area and the UK,” commented Stewart. “In the US, the Federal Reserve’s favoured measure of inflation, which strips out food and energy, is rising at the fastest rate in 30 years.”

A time of global growth

Stewart said at the global level, the most likely outcome is for continued growth. After contracting by 3.6% last year, the global economy is on course to post growth of 6.0% this year and 4.9% the next, according to the IMF (a normal year’s global growth is around 3.5%). 

As a result, business and financial markets are positioning for growth. Barring a return to full lockdowns – something that cannot be ruled out – growth rates are likely to remain well above normal levels in Europe and North America well into next year. In the UK, Stewart expects quarterly growth to run at about three times trend rates until the middle of 2022.

“The recovery has moved into a new phase, one marked by slower, more constrained growth and higher inflation,” said Stewart. “In coming months, the recovery will have to contend with the gradual winding down of government support [in the UK the furlough scheme and the £20 weekly uplift to Universal Credit end within four weeks]. The risks are manifest, but on balance we think the global recovery will keep going over the winter months, and into next spring.”

Not out of the woods yet

Meanwhile, Stewart warned that the pandemic is far from over. Global case rates are elevated, especially in Asia. Vaccines, when widely deployed, have substantially weakened the link between cases on the one hand and deaths and hospitalisations on the other. Nonetheless, the Delta variant of COVID-19 is far more transmissible than its precursors, many people are unvaccinated, and the vaccines are not 100% effective. In the US, where well over half the population is fully vaccinated, hospital admissions are running at 75% of their April peaks – although times in hospital and outcomes have improved materially.

Rising vaccine uptake and boosters will help limit the most serious effects of COVID over the winter, but individual behaviour will continue to play a major role. Restrictions of various sorts may need to be deployed too. This has been the experience of New Zealand, with its very low case and death rates, and Israel, with its rapid vaccination programme.

Tighter restrictions or even lockdowns could follow

Both New Zealand and Israel have had to tighten restrictions significantly over the summer to cope with rising case rates. (New Zealand’s case rates, it should be emphasised, are miniscule by US or European standards; at the peak in late August New Zealand’s case rates were running at one-fortieth of current UK levels.)

“To avoid lockdowns in Europe and North America over the autumn and winter, countries may require the selective imposition of restrictions in some form, as well as, for instance, measures such as vaccine passports to gain admission to venues,” said Stewart.

He added: “The UK government’s announcement that it was ditching its plan to require vaccine passports for entry to nightclubs at the end of this month does not mark the end of the matter. The prime minister’s office said that the plan would be kept ‘in reserve’ should it be needed.”

ESG literacy will be as big as the technology boom for business

One point raised during the webinar session was that, in Deloitte’s view, during the pandemic governments had not taken their foot off the gas in terms of climate change - if anything, the pace of action has increased. This is an area where guest speaker Richard Jones feels will be a driver for activity and growth, as opposed to causing disruption in the transition over from fossil fuels.

“I think it's going to become almost a hygiene factor,” said Jones. “In the same way that perhaps we talked about 10 years ago about digital technologies and the adoption of digital being an inherent part of business and becoming more and more a part of core business.”

Jones thinks ESG [Environmental, Social and Governance] fluency, commitment, being able to evidence what you are doing and how you are doing it is going to become a part to not only retaining people but winning and retaining clients and therefore winning in retaining business.

He continued: “I think that in a growth environment, whilst it's going to be difficult in the early stages, we'll grapple with what that means and the implications and the investment levels. I think it’s going to become a core part of the future of business, and therefore, everybody wants to be in the future of business, we're going to have to tackle ESG.” 

Click here to view Deloitte’s annual ‘Back to School’ webinar on global economic outlook.

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