Larger vaccination coverage and gradual easing of restrictions contributed to a rapid recovery of global economy in 2021. Economic rebound took place despite several Covid-19 outbreaks caused by the new variants of the virus.

Monetary and fiscal policy support allowed the economic activity to rapidly recover as the pandemic-related restrictions were eased.

Sizeable monetary and fiscal support, as well as more widespread availability of vaccines make it possible to expect that as early as at the beginning of 2022 most developed countries would regain the economic activity that they lost during the last two years (see Chart 1). The rapid growth was particularly boosted by the US, where the generous government support allowed the economic activity to exceed pre-pandemic levels in the first half of 2021. However, the recovery has overall been quite unbalanced in various countries across the globe, and to a large extent it has been greatly determined by the epidemiological situation and unequal access to vaccines. Sectoral recovery has not been balanced either as in-person services lagged behind sectors that could operate remotely.

Chart 1
GDP and forecasts (index; 2018 = 100)

Global manufacturing and supply chain challenges, rising energy prices and expected restrictions, as the Delta and Omicron variants rapidly spread, resulted in downward risks and slightly slowed down the rapid recovery of the global economy during the second half of 2021.

Limited supply and fast recovery of demand resulted in rapidly increasing inflation that encouraged to accelerate phasing out of the monetary policy support.

Supply limitations that interacted with rapid recovery of demand created pre-conditions for a significant price pressure that made inflation reach the highest level in recent history (see Charts 2 and 3). To respond to the rapid price increase that had proven to be more lasting than initially expected, and considering the gradual improvement of the epidemiological situation, several national central banks decided to start winding up the accommodative monetary policy that was implemented during the pandemic. The FRS decided to discontinue net asset purchases earlier than planned initially, i.e. until the beginning of March 2022, and the Bank of England discontinued their asset purchase programme in December. Furthermore, at the end of the year the governors of the FRS indicated that in 2022 they expected several interest rate hikes, while the Bank of England not only indicated hikes in the following year, but also implemented the first increase. In contrast, the ECB decided to continue net purchases under the APP for as long as necessary and to discontinue only net purchases under the PEPP in March 2022. As the financial markets noticed that the leading global central banks became increasingly concerned about inflation, they continued to price in a faster rise in interest rates in financial instruments, and these expectations outpaced the forward guidance of the central banks.

Chart 2
Global supply chain pressure index (deviations from the average)

Chart 3
Global prices of goods and global inflation (index; 2016 = 100)

Economic recovery took place in the context of geopolitical tensions that resulted in additional uncertainty and risks.

At the same time, several geopolitical events in 2021 created significant risks to the global economic development. The change of power in the US, strained relations between Taiwan and China (regionally, also deterioration of relations between China and Lithuania), disagreement between France and Australia, the US and the UK concerning the tripartite AUKUS agreement, the gradual escalation of the conflict between Russia and Ukraine, as well as the migration crisis were just some of the events that caused additional uncertainty about the global economic outlook.

Although global leaders reiterated their continued commitment to fighting climate change during the November UN Climate Change Conference (COP26) in Glasgow, the global economic recovery was accompanied by the emissions returning to the pre-pandemic levels. Extreme weather conditions and other climate threats materialised more frequently and were more severe in 2021 than before, resulting in significant losses to businesses and people.