In the eighties of the last century, the books of the literary series Choose your own adventure became fashionable among children and adolescents. After an introduction to the events, the reader was offered the possibility of deciding between different options that determined the actions that the protagonist undertook. The story therefore had different endings depending on the paths chosen. This random component that the books had is also present in the economic forecast reports for 2022 that in recent weeks have been published by different public and private organizations. The base scenario is that the next one will be another course with significant economic growth. However, the variables that could derail that roadmap are accumulating.Right now, the two main risks are the effects of omicron on activity and inflationary pressure, which, far from subsiding, threatens to stay with us longer than expected. This is what is expected of the world economy in 2022.
Increase
The year that is about to end has been magnificent from the point of view of economic growth.
After the shock produced by the outbreak of the coronavirus in March 2020, which plunged the planet into a severe recession, the recovery came in 2021 thanks to an unprecedented battery of fiscal and monetary stimuli.
The latest forecasts from the International Monetary Fund (October) place the improvement in world GDP at 5.9%, the highest rate in decades.
The progress of the economy would have been even greater had it not been held back by bottlenecks in supply chains starting in the summer.
In 2022, the consensus forecast is that growth will continue the deceleration phase that began a semester ago, but that it will remain at rates that are still above those obtained in the years prior to the covid. The IMF, for example, places the rise in world GDP at 4.9%. Economies will have to gradually get used to operating without so much liquidity in the system. “We believe that 2022 will be a year of two halves. In the first part, growth will be above average, followed by a normalization of activity rates as the reopening of economies is completed, excess savings generated during the pandemic are spent and extraordinary stimulus measures are keep retiring, ”explains Mark Haefele, UBS Global Investment Manager. Regarding the evolution by regions,From the Swiss bank they believe that we will also witness a divergence, "with developed economies growing well above emerging ones in the first half of the year, so that later developing countries regain greater dynamism than large ones."
Along with aid packages from governments and central banks, the other great catalyst for economic recovery in 2021 has been the arrival of the first vaccines against the coronavirus. The immunization of a large part of the world's population - especially in developed countries - allowed the reopening of economies and some normalization in sectors such as transport and tourism. However, the arrival of a new variant (omicron) at the end of November has once again generated uncertainty. Although it is very difficult to return to severe confinements such as those experienced between March and April 2020, some countries have begun to enact restrictions due to the alarming increase in the rate of infections. The evolution of the pandemic, therefore, will be one of the main uncertainties for the economy in the short and medium term,although experts trust that the worst is behind us. “There are good reasons to be optimistic about the evolution of the pandemic in 2022. Improved vaccines to deal with the virus will spread globally. At the same time, the development of antiviral pills can drastically decrease the number of hospitalizations, ”says Henry Allen, analyst at Deutsche Bank.
In the base scenario drawn by the experts, China would continue to lead world growth, although in a marked slowdown compared to previous years, while the differential in activity between the US and the euro zone should close to advance at similar speeds (between 4% and 4.5%).
In the case of Europe, an acceleration of growth is expected in Germany and Spain.
After disappointing in 2021, Spain should be one of the countries that leads the growth in the EU, although the forecasts continue to be low.
The latest cut comes from the IMF: it now places the GDP advance in 2022 at 5.8%, when last autumn it forecast 6.4%.
Inflation
After the Great Recession, prices went off the economic radar, no longer a problem, allowing central banks to pump money wildly into markets and lower interest rates to uncharted areas without fear of an inflation spike. It was then argued that demographic trends such as the aging of the population or the technological revolution, with the boom of electronic commerce at the fore, were lighting a new era of low prices.
This situation, however, has undergone an unexpected turn in 2021. The combination of higher energy prices, spurred in part by the transition towards a more sustainable model, bottlenecks in the global transport of products and the inability of supply (many factories reduced their inventories to a minimum after the coronavirus) to meet the strong rebound in global demand that emerged with the economic recovery has resulted in the awakening of inflation in most economies. In the US, for example, prices last November rose by 6.8% year-on-year, the highest record for the country's CPI in 39 years.
Inflation is the risk factor that experts fear most in 2022. The consensus of analysts considers that the pressures will continue, and they do not rule out that inflation forecasts will have to be corrected upwards depending on how events develop. Of the factors that are driving prices up, the one that is seen as the most cyclical is related to dysfunctions in global supply chains. "The bottlenecks should be solved between spring and summer of next year," says Joaquín García Huerga, director of global strategy at BBVA Asset Management.
However, there are more questions about when energy prices will relax. As Allianz experts recall in their 2022 strategy report, the fight against climate change will likely continue to spur inflation. "The increase in the prices of carbon dioxide rights and the economic adjustments necessary for a green economy will probably raise costs initially, although they can be expected to favor growth and the planet in the long term," says the German financial group. The other element that can lengthen inflationary tensions is wage policy in those labor markets, such as the United States, close to full employment.
"It is not clear to us that consumers will be able to face the strong inflation of energy, housing and many other products once the savings generated during the pandemic have ended," warns Víctor Peiro, director of analysis at GVC Gaesco.
The president of the United States Federal Reserve, Jerome PowellERIC BARADAT (AFP)
Interest rates
The reaction of central banks after the COVID explosion in March 2020 was clear: the liquidity tap is ruthlessly opened to sustain economies. The main monetary organizations kept interest rates close to zero and issued a blank check to States and companies with the purchase of debt in the markets to alleviate the cost of its financing. Even the European Central Bank (ECB) abandoned dogmatic tics of the Great Recession given the gravity of the situation.
The initial plan was to start draining these stimuli from 2022 in a progressive way so as not to damage the economic recovery. The strong rise in inflation, however, is putting pressure to accelerate the turn in monetary policy. As investors like to have predictability on the horizon, central banks, aware of the importance of communicating with the market, have taken advantage of their last meetings of the year to set the path their decisions will follow in 2022. What It seems clear is that the world will once again live a monetary epoch of various speeds, because not all regions will normalize their policies with the same voltage. “We will see a persistent divergence in the policy of the world's central banks, as their leaders try to balance price pressures,while sustaining economic growth. As usual, the US Federal Reserve will take center stage, and the timing and nature of its interventions will have a significant impact on the market, "explains Ritu Vohora, analyst at manager T. Rowe Price.
The first to press the red button was the Bank of England, which at its December meeting agreed to raise interest rates to 0.25% from 0.1% after knowing the inflation in November (5.1%). The market expects up to three additional hikes in the UK next year. The Federal Reserve has also been ambitious in its roadmap: in January it will cut the debt purchase program in half to end it in March 2022. From there it will begin to raise rates. The body chaired by Jerome Powell foresees up to three increases throughout the year in the face of a price hike that he no longer sees temporary, but "generalized."
On the other hand, the ECB prefers to be more cautious. It is true that inflation in the euro area is high (4.9%), but its component is more temporary and the recovery still needs some assisted breathing to consolidate. For this reason, the president of the organization, Christine Lagarde, announced last week that they will reduce the purchase of debt over the next year. From the current 80,000 million euros it will drop to 20,000 million in October. However, the ECB does not contemplate, except for an unexpected script twist, raising the price of money in 2022.
Some experts believe that the withdrawal of stimulus will be the cotton test to gauge the real strength of the economic recovery and its sustainability, since this has been mainly due to the millionaire monetary and fiscal programs.
"The withdrawal of stimuli will show the weaknesses of the economies sooner than the markets expect, preventing interest rates from rising," says Ricardo Gil, head of asset distribution at TREA AM.
Foreign exchange
The expected divergence in central bank policies will have an impact on the behavior of the world's main currencies. In 2021, the dollar has appreciated significantly against the euro, going from trading at 1.2 dollars per euro to levels close to 1.13 dollars. As the Federal Reserve will be ahead in the rate hikes, experts believe that the weakness of the European currency against the greenback will continue or even be accentuated throughout the next year.
“Our forecast is that the depreciation of the euro will continue, reaching $ 1.09 in the fourth quarter of 2022. However, that trend should stabilize in 2023 when the ECB begins to raise rates and the Federal Reserve has already completed in much of its monetary normalization strategy ”, they point out from BNP Paribas in their strategy report.
China
The second largest economy on the planet is clearly slowing down.
After being one of the few countries that endured the coronavirus shock without going into recession in 2020, the IMF expects it to end 2021 with growth of 8% and that in 2022 the advance of GDP will remain only at 5.6%.
It is a worrying factor, given the growing importance of the Asian giant in the world economic gear.
In part, this is a landing caused by the Chinese government in its attempt to change the country's production model to be more sustainable and less indebted, orienting it more towards domestic consumption and reducing its dependence on exports. However, in recent months several external factors have contributed to the slowdown. One of them is the energy crisis, which has hit the country squarely. Last September the power outages became general. Increased demand, a rise in coal prices, and tax cuts by the provinces to meet environmental targets were the culprits. In addition to energy tensions, bottlenecks in world trade slowed exports from what is considered the world's factory.
"China's zero tolerance for covid means lockdowns and strict sanitary measures that have also ended up taking a toll on the activity. Many indicators, from domestic flights to income at shows or traffic jams, show the impact of these measures, "recall Barclays analysts in a recent report.
Without minimizing the aforementioned factors, the problem facing the Chinese real estate sector is the aspect that worries the most. Evergrande real estate's struggles are just the tip of the iceberg. The crisis of confidence towards highly indebted property developers has caused sales of new apartments to stagnate, eliminating a key source of financing and leading to lower construction activity, more debt restructurings and lower sales.
“It is likely that the authorities will intervene at some point to stabilize the sector, given the possible negative consequences for the financial system and the economy in general of a complete collapse of the real estate market.
Even so, the lags between the weakness in sales of land and new homes and activity will mean that the evolution of construction will continue to be weak in 2022. It must be taken into account that this sector has traditionally accounted for a fifth of Chinese GDP " recalls David Rees, senior economist at Schroders, in a note.
Geopolitics
The link between politics and economics is becoming closer. After the sad episode in Belarus, using refugees together with Poland to pressure the European Union, the year closes with a notable increase in tension with Russia due to its decision to accumulate troops on the Ukrainian border. Brussels has already threatened Moscow with "huge" sanctions if it invaded this country.
Another hot spot is US-China relations. Although there has not been a serious diplomatic and commercial deterioration since the election of Joe Biden, there has not been a significant improvement over the tensions that existed during the term of Donald Trump. Of course, both countries have been open to resuming dialogue, and experts believe that Washington could lower the tariffs imposed on Beijing, in an attempt to reduce internal inflationary tensions. "However, we believe that relations between the two countries will continue to be relatively complicated, and that even possible commercial advances would not necessarily guarantee a significant appreciation of the stock markets," says Louisa Lo, manager of Schroders.
The year 2022 will also put the new German coalition government, led by the Social Democrat Olaf Scholz, to the test, in the face of pressure from the hawks in favor of reducing fiscal and monetary stimuli as soon as possible. In France, for its part, presidential elections are held in the coming year. The most likely scenario is that Emmanuel Macron will win re-election. A victory for any candidate from the far right (Marine Le Pen or Éric Zemmour) would take France and the EU into uncharted territory. There will also be elections, in this case parliamentary, in Portugal at the end of January. In Italy the unknown is who will replace Sergio Mattarella as president next February. Mario Draghi's option is gaining strength and the former president of the ECB himself is beginning to see that alternative favorably in public.Finally, in Latin America there are two electoral appointments to elect a president: Colombia (May) and Brazil (October).