Economic things to be aware of in 2022, why should I care?
After the turmoil and unpredictability of the past two years, many economic pundits expect that 2022 will be a somewhat calmer year. However, in late 2019, when the first reports of the new coronavirus started to emerge from Wuhan in China, few people imagined within months that the world economy would be flattened by a devastating pandemic. With this in mind, we will discuss in this insight some of the big risks and other things to look out for this year.
1- A possible new Covid variant to further derail the global economy?
At this moment in time, it is too early to determine just how serious the Omicron variant of the virus will prove to be, however it has already provided some hope that life may return to a pre-pandemic state. This is supported by the fact that most consumers have not needed to be instructed to obey restrictions, this is due to the variant seeming less serious than the delta and original variant. Another reason why restrictions haven’t been heavily enforced in the UK is due to the public being sensible enough to self-isolate and self-enforce physical distancing. A return to full-scale lockdowns would have severe consequences.
Although despite this, Dhaval Joshi, an economist at BCA Research, expects more and more variants to develop and emerge, with one or more of them to cause chaos. The danger of a new variant comes from three properties, he says:
- its contagiousness (how easily can it spread)
- ability to evade vaccines and natural immunity (how well it can survive against countermeasures)
- severity of the disease that it causes (how lethal it is)
“The big issue is not whether the omicron variant is a ‘super-variant’. The big issue is that, eventually, a new variant will be a ‘super-variant.’” If a new “super-variant” does indeed emerge (which is fairly likely) then it could spell disaster for the world economy.
2- Inflation to increase even further
The unexpected pick-up in price pressures has been one of the notable economic trends of 2021. The Bank of England, the US Federal Reserve and the European Central Bank were all seemingly unprepared for the sharp increase in inflation, caused by a combination of rising energy prices, labour shortages and supply-side bottlenecks (one such major example being the world microchip shortage). In addition to this, the Bank of England expects the annual increase in the cost of living to be above 5% by next April.
Central banks will face some difficult decisions in dealing with this issue. Alarmingly, just before Christmas, Saxo bank came up with a list of 10 “outrageous” predictions of unlikely but under-appreciated events for 2022 with one of them being a wage-price spiral in the US, with a possibility of sending inflation in the world’s biggest economy above 15%. Even a slight rise would cause the Fed to tighten policy aggressively, therefore if somehow inflation were to rise this drastically it could cause a degree of chaos.
3- China to hit the buffers and turn nasty
Over recent years there has been some speculation that the world’s second-biggest economy is on the verge of having a severe economic downturn (although it hasn’t happened). However, cracks are starting to show, starting with their legacy problems which have now started to fuse with current difficulties to whip up what could prove a perfect storm.
Example of these past legacy problems can be exemplified in Beijing’s as they attempt to manage the failure of the property giant Evergrande, and prevent it from infecting the entire economy. Along with many other companies in the sector, Evergrande expanded when Beijing loosened policy and ran into trouble when the authorities took steps to deal with the overheating economy. Furthermore, China’s no-risk approach to Covid-19 has been central to the global economy’s supply-side problems. As China’s economy has cooled, the nationalist rhetoric from Xi Jinping has been ramped up further, particularly towards Taiwan. Economics and geo-politics threaten to collide in 2022 – this makes China an interesting country to watch in 2022.
4- An emerging markets crisis
The 30% drop in the Turkish lira in November alone has alerted financial markets to the dangers of a crisis in emerging markets. Although, most of Turkey’s problems are country-specific, caused by their somewhat unorthodox approach to monetary policy. Many currency dealers have been unimpressed by the Turkish President’s insistence that the way to cope with soaring inflation is by cutting interest rates. As a result, faith in the other big emerging market economy has dwindled as they are viewed as high-risk – Argentina also being a victim of this.
Despite this, there seems to be a more systemic issue beneath the surface, which is that many emerging markets have borrowed heavily in US dollars and have often used future export earnings as collateral. This is worrying because if the US Federal Reserve decides to tighten policy, the dollar is likely to strengthen, making it more expensive for poorer nations to service their debts. Furthermore, if the global economy also slows, they will face double the economic damage. The World Bank and the International Monetary Fund are already warning of increased debt distress.
5- A financial crash
Asset prices – shares, bonds and property – these have all risen since the initial sell-off at the start of the pandemic. Rock-bottom interest rates and the mass injection of money into financial markets caused by quantitative easing programmes have made it cheaper to move home and to borrow money for speculative activity.
Asset prices have also received a boost by the message sent out from central banks that any tightening of policy will be limited and gradual. However, economies have already started to slow after a period of catch-up growth in the aftermath of lockdowns. The risk is that despite weaker activity, central banks are likely to be forced into more drastic monetary policy action by higher-than-expected inflation, thereby kicking away the prop that has been supporting richly valued assets.
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