Following these events, we expect significantly slower economic growth over the coming years.

• UK: We expect significantly lower growth of around 1.0%. Data from the Office for National Statistics (ONS) suggests that productivity growth has slowed sharply from around 0.75% per year in the decade after the global financial crisis and around 2% during the so-called Great Moderation (the decade from 1998 to 2007) to 0.5% per year
• Eurozone: While facing the same headwinds, the region may experience a less marked deterioration, with its trend GDP growth falling to around 1.25%, according to Eurostat – only slightly below its level in the 2010s. The region’s labour market is finally catching up with those of the US and UK, but productivity is still well behind the US.
• US: Growth is likely to fall, primarily due to the labour force growing more slowly than in previous years. We forecast trend GDP growth in the US of around 1.8% over the coming years, primarily due to annual productivity gains of around 1.5%, according to the Bureau of Labor Statistics (BLS). 

Real GDP growth, annual averages (%)

Until recently, keeping inflation under control was relatively easy thanks to global factors such as sustained disinflation in global goods prices during the Great Moderation, and relatively subdued domestic demand during the years of austerity.

But global disinflation looks unlikely in the coming years, in what’s likely to be a more protectionist environment, with more stringent regulation (including green initiatives) and increasing onshoring and nearshoring. Domestic price pressures are also likely to remain persistently higher than before the pandemic.

In the US, for example, imported and domestically generated inflation have averaged 5.5% since the pandemic, according to the BLS. With the drivers of the run-up in imported inflation in recent years dissipating, the focus of those looking to tame US inflation will move to the labour market, where a sustained correction of imbalances will be needed to drive wage growth down.

Global goods inflation (% year-on-year)

Meanwhile, having surpassed 10% at the end of 2022, Eurozone inflation has dropped rapidly over the course of 2023 and in October it returned to 2% for the first time in more than two years, according to Eurostat. We expect inflation in the region to return to target around mid-2024. Factors such as protectionism are likely to keep underlying inflationary pressures higher in the euro area than they have been until recently, as will a more accommodative fiscal policy. But given inflation persistently undershot its 2% target before the pandemic, this might provide some benefits in Europe’s case.

Perhaps the biggest overarching theme for the 2020s economy is the return of protectionism. Trade patterns are shifting in response to the pandemic, geopolitical frictions, and more active industrial policy. Global trade volumes monitored by the International Monetary Fund (IMF) have faltered, with trade growth having slowed from an average of 5.9% per year during the Great Moderation and a still-respectable 3.6% in the post-global financial crisis / pre-pandemic period to a contraction of 3.2% over the past year.

Geopolitical and security considerations are the main drivers of rising barriers to trade in areas such as semiconductors. A new ‘green protectionism’ is also on the rise, with countries dishing out subsidies under the veil of accelerating the green transition – the Inflation Reduction Act in the US being the prime example. Industrial policies are being reformulated to strengthen supply chains through trends such as reshoring and nearshoring. And while tariffs have remained low, the number of trade interventions in the form of non-tariff measures has risen significantly since 2020. Trade concerns raised at World Trade Organization (WTO) committees have increased significantly.

In fact, the WTO has highlighted that trade is becoming increasingly fragmented and that there’s a tendency towards regional, rather than global, trading agreements. WTO data suggests the share of intra-regional trade is edging up, most notably in Asia, where it accounted for around 13% of trade during the Great Moderation but around 24% today.

Food protectionism has also made a comeback as governments try to provide relief from rising prices and maintain supplies for their domestic consumers. India, for example, has restricted exports of rice following earlier bans on wheat and sugar. Such actions risk driving up global food prices further, on top of the pressure on prices linked to the war in Ukraine.

Any questions? Get in touch with our authors today.