Global Macroeconomic Outlook

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Global Economy: Headwinds challenge recovery’s pace 

U.S. Expansion Continues at a Slower Pace

We expect continued economic growth in the U.S. but at a slightly slower pace than in 2021. Consumer demand, an accommodative Fed and federal government spending continue to support growth. But supply chain disruptions, labor shortages, elevated inflation and regional COVID-19 outbreaks remain ongoing challenges to economic growth.

Europe Sees Widespread Growth

The eurozone economic recovery appears resilient, and we expect advanced and emerging European economies to maintain solid growth rates in 2022. Accommodative government and central bank policies continue to support the recovery. However, supply chain issues, inflation, rising energy prices and renewed COVID-19 lockdowns in some countries remain persistent headwinds.

Real Estate Market Clouds China’s Outlook

Falling home prices and mounting challenges for China-based real estate developers threaten to weaken China’s economic growth outlook. Elsewhere, Asian and Latin American countries have made progress with vaccine distribution and containing virus outbreaks. These developments should continue to aid growth. Additionally, rising commodity prices remain supportive of growth in several emerging markets (EM) countries.


Inflation: Pricing pressures persist 

Price Gains Should Ease Off Recent Highs

After recently climbing to a nearly 31-year high, inflation should moderate in 2022. Base effects should reverse to some extent, but shelter and goods prices likely will continue to climb. Furthermore, massive fiscal spending, Fed policy, supply chain disruptions, labor shortages and rising commodity prices remain ongoing inflationary pressures. Eventually, as supply/demand imbalances improve, we expect annualized inflation to settle in a range of 2.5% to 3.0%.

Soaring Energy Costs Fuel Inflation in Europe

Surging energy costs and supply shortages continue to push inflation in Europe and the U.K. to multiyear highs. Annual inflation in the eurozone and U.K. recently topped 4%. Base effects from last year’s shutdowns and growing consumer demand for goods and services also remain vital factors. Despite these challenges, central bankers in Europe expect inflation to ease near target levels in 2022.

Inflation Uneven in Emerging Markets

While rising prices are generally the trend throughout the world, inflation in some EM countries remains relatively subdued. For example, prices are ticking higher in China, but the annual inflation rate remains relatively low compared with other markets. Meanwhile, Turkey, Brazil and Argentina are battling double-digit inflation rates. In addition to rising energy prices, monetary policy and currency devaluations have contributed to these soaring inflation rates. 


Monetary Policy: Central banks still supportive 

Fed Takes Slightly Hawkish Turn

Although the Fed continues to taper its bond-purchase program, the central bank’s overall monetary policy remains mostly supportive. And with Jerome Powell now at the Fed’s helm for another term, policy stability should remain intact.

After launching a $15 billion reduction in monthly bond buys, the Fed insisted it will adjust the pace of monthly asset purchases as the economic outlook warrants. But while the Fed continues to hold interest rates steady, we believe elevated inflation may force the central bank to hike rates sooner than originally planned.

Europe Maintains Dovish Policy

Despite a multiyear-high inflation rate, the European Central Bank remains committed to holding interest rates at 0%. Policymakers believe inflation’s recent surge is temporary and won’t hike rates until inflation stabilizes at 2%.

So far, the downside risks of slowing growth and a potential upturn in unemployment have outweighed inflation concerns, keeping the Bank of England on hold. However, the inflation-sensitive central bank may reconsider its rate policy amid rising energy prices.

China Limits Risk-Taking with Steady Rates

The People’s Bank of China is holding steady its benchmark interest rates for corporate and household loans. Policymakers are seeking to limit risk-taking in the volatile property sector. They also want to maintain stability amid a bumpy domestic recovery.

Risks to China’s growth, including onshoring trends, supply chain disruptions and weak domestic demand, should keep interest rates unchanged in the near term.


Interest Rates: Rates on the rise 

U.S. to See Sustained Higher Rates

We believe steady economic growth combined with elevated inflation and continued supply/demand imbalances will increase Treasury yields. We expect the 10-year Treasury yield to approach 2.0% over the next several months, which should cause the yield curve to steepen.

In the short term, however, the curve could flatten modestly, as investors price in central bank policy errors. Specifically, inflationary pressures may force the Fed to raise rates sooner than initially planned.

Developed Markets Yields Slower to Rise

Steady economic gains and higher inflation should push European government bond yields higher. But core European rates likely will remain notably lower than their U.S. counterparts. U.K. rates are rising faster than their eurozone peers, while rates in Japan are hovering slightly above the central  bank’s 0% target. We expect rates in developed markets to trend slightly higher but remain below U.S. yield levels.

Emerging Markets Rates Higher

EM local rates are structurally higher than developed markets rates. However, the real interest rate differential has swung in favor of emerging markets, as inflation has risen in the U.S. and Europe.

Many EM central banks have started raising rates, including in Mexico, Brazil and Russia. These rate hikes reflect the need for EM countries to control inflation to prevent a currency devaluation. This should offer some support to EM currencies alongside the potential for yield pickup from local rates.


Q1 2022 Investment Outlook Resources

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

International investing involves special risk considerations, including economic and political conditions, inflation rates and currency fluctuations.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.

Diversification does not assure a profit nor does it protect against loss of principal.

Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.

Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

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