Executive
Perspectives

Growing but Slowing—
Planning for the World
Economy in 2022
October 2021

GROWING BUT SLOWINGIn planning the next chapter, leaders should start with a macro view in mind and translatethat systematically to their markets, situations, and strategies.

BCG Executive
Perspectives
IN THIS DOCUMENTKEY MACRO TRENDS COMPANIES MUST CONSIDER
Fiscal policy and vaccines have underpinned a successful global rebound, though withvarying degrees of structural scarring. As stimulus retreats and the growth bounce
fades, households can tap booming labor markets as well as strong savings and balance
sheets to pick up where policy makers left off. While the economic recovery is slowing, thegrowth context is strong for 2022 and the Delta variant has shifted growth out, not down.

US DEEP DIVE | FACTOR IN US DYNAMICS AND RISKSAt the frontier of the global recovery, the US is the first to navigate risks related to the strong
rebound. Bottlenecks in labor markets will take more time to ease and even when they do,
wage pressures will continue, necessitating that firms invest in productivity growth. Productmarket bottlenecks will also persist as demand overshoot will keep straining productive
capacity and inflict intense localized pain. Inflationary pressures will continue in the first halfof 2022 but are less likely to be structural. The retreat of monetary policy will likely be slow,
but policy errors remain the greatest risk of potential volatility to markets and the economy.
Source: BCG

2

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As executives turn to planning the year ahead, they face a growing but slowing global
economy. Although stimulus is fading, consumers are well placed to carry the expansion
forward. But leaders must also navigate risks that—while contained for the macroeconomy
as a whole—can threaten individual sectors and firms.

Planning season: 12 priorities emerging from macroeconomic trends

Insights from the US economy

Growth slowdown

1 Prepare for growing but slowing macro outlook, as many economies return to tight conditions
2 Account for multiple growth dynamics as varying degrees of structural scarring materialize

Consumer-led recovery
going forward

3 Focus on drivers behind consumers’ ability to sustain recovery as fiscal stimulus retreats

Labor market
bottlenecks

5 Expect acute bottlenecks to ease as intense “scramble” to rehire workers lessens

Product market
bottlenecks

7 Monitor economy’s inventory dynamics to separate macro stress from intense localized pain

Inflationarypressures

9 Understand and monitor the drivers of cyclical vs. structural inflation to assess risks

Monetary policy
and rates
Source: BCG

Considerations when planning for 2022

4 Assess demand shifts and the drivers and sustainability of consumption overshoots

6 Protect margins with productivity-enhancing investments as wage pressures will persist

8 Invest in supply chain resilience to continue recovering and prepare for future disruptions

10 Do not conflate temporary pricing power with persistent pricing power and act accordingly
11 Plan for soft and orderly exit from ultra-low policy rates but risk of faster pace of tightening
12 Consider the risk of volatility as policy errors have potential to upset markets and even the cycle

4-5
6-8
10-12
13
14-16
17
3

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Six macro trends in 2022

Contextpages

A fast and strong global recovery—with varying degrees of structural
scarring and an expected growth slowdown in 2022

95
90
85

Levels recovery

80

22
21
20
19
18
17
2015

2020

3.50
3.25
3.00
2.75
2015

2025

Japan
Levels recovery: Expected soon
Trend recovery: Not full

2020

560
540
520
500
2015

2025

2020

2025

2021

2023

2025

Global economy has made a “levels
recovery” (back to 2019 output levels)
but will take more time to return topre-COVID trend (i.e., structural
scarring)

125
100
75
2015

2020

2025

2.0
1.8
1.6
2015

2020

2025

(2004/05 Rupee trillions 1)

2019

BrazilLevels recovery: Completed
Trend recovery: Not full(2000 Real trillions 1)

2017

China
Levels recovery: Completed
Trend recovery: Completed(2015 RMB trillions 1)

70
2015

Emerging markets

75

India
Levels recovery: Expected soon
Trend recovery: Large impairment
200
180
160
140
120
100
2015

2020

Growth slowdown in 2022 built into V-shapes, returning many economies to a 2019-like growth environment
1. SAAR (Seas onally adjus ted annual rate); Source: Oxford Economics , BCG

2025

4

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Trend recovery

Germany
Levels recovery: Expected soon
Trend recovery: Not full(2015 ¥ trillions 1)(2015 $ trillions1)

100

US
Levels recovery: Completed
Trend recovery: Overshoot expected(2015 € trillions 1)

World GDP

…with levels recovery within sight everywhere, but trend recovery has wider
distribution (structural scarring) in emerging markets(2012 $ trillions 1)

Global economy has reboundedstrongly since the depths…

Developed markets

1

1

Fiscal stimulus successfully limited structural
damage…1…but now flips from being tailwind to headwind(as it is expected to fade in 2022)
1-year change in government balance (%)

COVID fiscal stimulus (% of GDP)

Current estimate of 2024 GDP (vs.
pre-COVID estimate of 2024 GDP, %)

2
0
-2
-4
-6
-8

0

5
PolandRusssia

Switzerland
CanadaNetherlands
Germany
FranceSweden
Italy
China
South
Saudi Korea
BrazilArabiaSpain
Argentina
Mexico

15

20

25

Japan

30
US

South
Africa

-12

-25
-20
-15

Australia
UK

Increasing deficits
provided economic
tailwind

USEuro area

China

-10
-5
0

Indonesia

-10

-14

10

Thailand

Extent of ultimate
recovery loosely
linked to the size ofthe deployed fiscal
stimulus

India

5
10

Shrinking deficits
point toward
economic headwind

15
20

Q3

Q4

2019
1. Sample G20 + Netherlands , Poland, Sweden, Switzerland, Spain; Turkey is left out due to data is s ues/reliability
Source: IMF, Oxford Economics , BCG

Q1

Q2

Q3

2020

Q4

Q1

Q2

Q3E Q4E Q1E Q2E Q3E Q4E

2021

2022E

5

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Stimulative fiscal policy, which successfully contained structural damage,is now (appropriately) in retreat around the world

1

Retail sales have overshot, initially supported by stimulus,
but lately have been maintained by the consumer
Retail sales (Index = 100 for 01/2019)

US

130
120
110
100
90
80
70

130
120
110
100
90
80
70
01/19

France2019 average

Currently retail sales in the US are more than 25%
higher compared with the beginning of 2019,translating into more than an extra $100 billion insales per month

UK

BrazilThe rest of the post-COVID expansion depends evenmore on consumers’ ability to carry it forward
The household sector is well positioned to sustain
demand—and is even able to push demand higher

07/19

01/20

07/20

01/21

07/21

01/19

07/19

01/20

07/20

01/21

07/21

Note: Retail s ales in value terms (i.e., nominal). Due to difference in country definition, retail s ales are bes t used looking across time within a country rather than acros s countries, s o compare the green vs . yellow lines.
Source: BEA, Office for National Statis tics , Is t Nat de la Statis tique et des Etudes Economiques, Russian - European Centre for Economic Policy/Haver Analytics , BCG

6

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Recoveries throughout the world in 2021 are currently in a “risky window”
of handoff from policy makers to consumers

Strong job opportunities liftconsumer outlook in many countries

Households have accumulated
trillions in savings during pandemic

Wealth growth across nations

Household checking deposit(indexed to 12/19 values = 100)
US

Germany

300

200+$2.3tn

200

Increase in financial wealthin the US€0.67tn

Increase in financial wealthin Germany+€0 .3tn

150

Japan

UK

200

200

+¥10 0 tn

150

s avings
accumulated

100(¥500tn)s avings
accumulated+£0 .3tn

150

s avings
accumulated

Note: rounded numbers
Sources : Conference Board, Federal Res erve Board, Bank of Japan, Deuts che Bundesbank, UK Office for National Statis tics , Aus tralian Bureau of Statis tics , BCG

Increase in financial wealth¥91.3tn in Japan

06/21

03/21

12/20

09/20

06/20

03/20

12/19

06/21

12/20

09/20

100
(£1.5tn)
06/20

12/19

Is median duration to find a job
13 wks. in Australia, down from 27
weeks last year

$18.6tn100(€1.8tn)100($1.2tn)

03/20

55%+

Of UK hospitality businesses
view staff availability as aconstraint on growths avings
accumulated

03/21

~55%

Of US respondents say there areplentiful jobs in the market(highest since 2000-2001)

7

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1Consumers in strong position to sustain expansion due to booming labormarkets, large savings, and record wealth

1

Economies have largely decoupled from virus trajectory– in India, larger second wave drove smaller drawdown

Quarterly annualized, trillion 2011/12 Rupee

Quarterly annualized, trillion 2012 USD

160

GDP
path

20

140

Pernicious second
wave, comparatively
modest GDP drawdown

120
100

Case count (monthly, millions)

Virus
path

8
6
4
2
0

In the US, the spike in Delta COVID cases changed
growth expectations – pushing it out, not down

19

Delta surge shifted growth
expectations out but not
down• Surge in cases
moderated growthestimates in second
half of 2021
• …but also contributed
to rising estimates inall quarters of 2022

18
16

Case count (monthly, millions)

Modest firstwave, enormous
GDP drawdown

2018

GDP
path

20

10
Virus
path
21

22E

Sources : Bloomberg, Federal Res erve Economic Data, Johns Hopkins Our World in Data, Projections from Oxford Economics , BCG

5
0

2018

19

20

21

22E

8

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Economies have also begun to "decouple" from the virus, meaning that
COVID case surges likely to shift recovery and growth out but not down

2

US deep dive | Overall healthy outlook for 2022, with need to navigate
four risks of the 2022 macroeconomic environment

US economy at frontier of rebounding global economy: US stimulus has led the world anddelivered a faster and stronger rebound than in most other economies. It also means that the US isthe first to experience bottlenecks in labor and product markets associated with a strong
consumption overshoot - dynamics that are growing around the world
US centrality to global system: US dynamics matter not only because of weight of US economy inglobal system but also for financial and monetary policy spillovers to the rest of the world

In the US, consumer spending will support a healthy outlook for 2022, with expected growth still above(long-term) trends. Although risks are likely to ease, need to monitor and manage four areas:

1

2
Labor market
bottlenecks

Source: BCG

Product market
bottlenecks

3

4
Inflationarypressures

Monetary policy
normalization
9

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Important to consider US economic outlook in your 2022 planning:

2.1
2.2

US economy operates above pre-COVID levels... but with 5 million fewer workers

Trillions of real 2012 USD

Number of workers (millions)

20

160

19

5M
workers

150

18
140
17
130

16
15

2015

16

17

18

19

20

21

120

2015

16

17

18

19

20

21

Such a fast divergence is impossible without causing bottlenecks across the economy
Source: BEA, BLS, BCG

10

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Bottlenecks in labor and product markets will take time to ease—withdifferent rates of normalization of demand and supply

Total labor demand remains below preCOVID levels…

… but those who fired in a big way have scrambled to hire workers
back in a big way—and have had to pay much higher wages
Millions of jobs

22 million workers let go during
the pandemic in just 2 months

8

Wage growth (Y/Y)
16%

US hiring until Sept
20211 (left axis)

12%

US wage growth(right axis)

4

8%

Ave rage hourly e arni ngs

4%
0

0%

-4

1. "Layoff" difference between 2020/2021 minimum and Dec 2019; “hiring" change between minimum and Sept 2021. 2. Note: even under the bes t of circums tances, it takes more time to hire than to fire. Source: BLS, BCG

Utilities

MiningInfo
services

Wholesaletrade

Financial

Nondurable
goods manuf.

Transport/
Warehousing

Durable goods
manuf.

Construction

Other
services

Business
services

Retailtrade-8
Leisure/Hospitality

Even if all the new open positions(~4 million) were filled today,
payrolls (total labor demand) would
still be below pre-COVID levels

Layoffs during the
pandemic1 (left axis)

Education/
Health17 million have been hired backover a much longer period2

11

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2.1

Labor bottlenecks: Labor demand in the US is still below pre-COVID levels—
hiring difficulties and wage growth driven more by speed of hiring

Real wage pressures will persist as the US labor market quickly returns totightness, necessitating a strategic response by firms to protect margins…necessitates planning for persistentwage pressures

US post-COVID cycle returning to tightness in record time…
14%
Post-COVID expansion(starting 2020) on verge ofturning “tight”

12%

While hiring difficulties will likely ease,the labor market will not return to theeasy condition that lasted for most of
the previous cycle—it will remain tight

Unemployment rate

10%
Post-GFC1 expansion (starting 2009)
took ~90 months to turn tight

8%

Wage growth will put cyclical pressure
on margins—firms forced to absorb or
offset with greater productivity growth

6%
4%
2%

Passing through to consumers notpossible for every company, all the time—risk of loss of market share

Level of unemployment at which labormarket is considered tight (u*)

0%
1

13

25

37

49

61

73

Months into expansion
1. Dark green curve s hows global financial crisis of 2008/2009
Note: u* at Mar 2017
Source: NBER, BLS, CBO, BCG

85

97

109

121

Tight cycles, when labor is less available,
tend to spur capital investment and lift
productivity growth cyclically12

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1.8
2.1

Inventory-to-sales ratios are low…

…largely driven by high goods
consumption…

...while inventories are mostly stable,
though many painful exceptions persist

High goods consumption persists even as vaccinesand easing restrictions allow services to come back
Retail inventory-to-sales ratio

Goods and service consumption (relative to baseline)

Inventory (100 = 12/2019)

1.8

100

120

1.6

Retail (excl.auto)

100

Wholesale:durable

0
80

1.2
1.0
2006 08

Goods consumption proxy

50

1.4

Wholesale:nondurable

-50
10

12

14

16

18

20

-100

Services
consumption
proxy
1

3

5

7

2020

9

11

1

3

5
2021

7

9

Retail: auto

60
12/19

3

6

9

12

2020

Strong rebound in demand exacerbates localized bottlenecks in supply chains which havebeen strained by pandemic-related production interruptions creating acute pain for some
Source: Cens us , BEA, NBER, BCG

3

6

9

2021

13

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2.2

In US product markets, many firms also struggle to meet demand andexperience disrupted supply chains, largely due to high goods consumption

Transitory inflation spike (post-WWII bottlenecks): Driven
by reopening and bottlenecked consumer economy

Structural regime inflection (60s-70s): Years of tight economy
and sustained policy errors permanently shifted inflation up

Headline inflation (Y/Y)

Headline inflation % (Y/Y)

25

25

Post-WWII
readjustment

20

20
KoreanWar squeeze

15

15

10

10

5

5

0

0

-5
1945

1950

1955

1960

Analogy highlights transient pressures related tosystemic bottlenecks and consumption surge
Movement is up and down but not a structural inflection
Source: BLS, BCG

1965

-5
1960

1965

1970

1975

1980

Analogy highlights slow-motion breaking of inflation
regime related to tightness and policy errors
Movement is up and up with ever-higher lows
14

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2.3

Inflation: Key question for 2022 is whether inflation is a transitory spikeor a structural inflectionKnow the mechanics and drivers ofeach inflation print

Month-over-month inflation has
been contained, highlighting thatyear-on-year prints are driven by baseeffects1
Year-over-year prints must stayhigh until at least April and May of2022, which is the first opportunity toroll out of high base effects of April
and May of current year
If month-over-month remains atcurrent levels until then, year overyear inflation would fall by May 2022

Y/Y elevated but M/M not—focus on month-over-month evolution

Inflation 2 (%)
1412

1M annualized change

10

3M annualized change

8

6M annualized change

6

12M annualized change

4
2
0
-2
-4
-6

1

3

5

7
2019

9

11

1

3

5

7
2020

1. Bas e effect refers to the impact of the corres ponding “base” or period of the previous year on current growth es timates (e.g., during 2020 low core CPI); 2. Bas ed on Core CPI
Source: BLS, BCG

9

11

1

3

5
7
2021

9

15

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2.3

If month-over-month inflation remains contained, the first opportunity for
year-over-year decline is April 2022, given base effects. Will it happen?

2.3

Broad-based measure (median inflation) not spiking
higher, despite surges in headline inflation…
Raw inflation figure(all items)

Captures only the center of CPI
basket used to calculate inflation 1

Y/Y change

6%5%…caused by a few reopening-related consumption
categories
Two-thirds of inflation driven by COVID-sensitive sectorsthat account for ~17% of the CPI basket
100%

Headline
CPI

34%

M edian
CPI

4%
3%

83%

2%
1%
0%
-1%
-2%
-3%
2000

100%

2005

2010

2015

2020

2%
<1%
7%
4%
3%
CPI basket weights 2

5%

Other

16%

Car rental
Auto insurance
HotelsAirfareEnergy4%

New cars

27%

Used cars

3%
5%
6%

Contribution to inflation (%)2

1. The median CPI excludes all price changes except for the one in the center of the dis tribution of price changes, where the price changes are ranked from lowes t to highes t (or mos t negative to mos t pos itive); 2. Average
March, April, May 2020;
Source: Bloomberg, BLS, Federal Res erve Bank of Cleveland, BCG.

16

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Evidence of broad-based inflation continues to be scant as a small
number of items—not the whole price basket—are driving inflation prints

2.4

Monetary policy is set to tighten - but very gradually

Market-implied path of policy interest rate (%)
3.0

Soft and gradual exit from ultra-low rates expected bymarket and Fed as inflation thought to be transitory

Fed's view of neutral rate

2.5
2.0

If inflation proves not to be transitory, the pace oftightening will quicken to contain the risk of a structural
break of inflation regime

1.5
1.0
0.5
0.0
2022

If the Fed turns out to be wrong about transitory inflation,
it will need to tighten policy faster, which would upset
markets and could even risk the cycle

23

24

25

26

27

28

29

30

31

Market pricing of the Fed’s rate path does not exhibit expectation of
spiraling inflation
Source: Federal Res erve Board, Bloomberg, BCG

This would rapidly tighten financial conditions anddisrupt financial markets, threatening the economic expansion
Risk of “policy error” is up—could either be to tighten too
soon or too much (triggering recession) or policy inaction(risk of regime break)17

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Policy should normalize in an orderly way—but if inflation starts to lookstructural, policy makers would tighten faster to prevent a structural breakClick here to read past editions of Executive Perspectives
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