The global economic recovery is likely to continue, albeit at a slower rate. Health outcomes will remain important given the emergence of the Omicron variant, but the outlook for macroeconomic policy will be more crucial. Labor markets will continue to tighten, with several major economies, led by the U.S., quickly approaching full employment.

Our outlook focuses on these key themes:

Inflation will be lower but stickier. We anticipate that supply/demand frictions will persist well into 2022 and keep inflation elevated. But it is highly likely that increases in the prices of goods and services will slow during the year, even amid persistent wage gains.

The risk of a policy misstep has increased. Central bankers will have to strike a delicate balance between controlling inflation expectations and supporting full employment as they withdraw exceptionally accommodative policies. In the United States, the Federal Reserve may have to raise rates higher than some expect, perhaps to at least 2.5%.

Rising rates won’t upend bond markets. Rising inflation and policy normalization mean that the short-term interest rates targeted by the Fed, the European Central Bank, and other developed-market policymakers are likely to rise. But rising rates are unlikely to produce negative long-term total returns in bond markets. We expect annualized U.S. bond returns of 1.4%–2.4% over the next decade.

Equities face a challenging environment. Low bond yields, reduced policy support, and stretched valuations in some markets form a challenging backdrop for equities. We are projecting the lowest 10-year annualized returns for global equities since the dot-com bubble of the early 2000s. For example, we expect U.S. equity returns of 2.3%–4.3% per year.

For more details, read our global outlook summary or the complete research paper.