What will the global economy look like in 2022?
2:48
(CNN Business) -
The US economy is heading into 2022 with great momentum.
The recovery of the US economy has gained momentum in recent months, culminating in what could be the fastest year of GDP growth since 1984, when Ronald Reagan was in the White House.
The hope is that this rapid expansion will continue into 2022, allowing the country to heal most of the economic wounds caused by the health crisis.
The labor market could return to full employment by the end of 2022. And red-hot inflation is expected to finally cool down, moving toward healthier levels.
And yet the last two years have shown how unforeseen events can alter forecasts, sometimes dramatically.
Despite its recent strength, the recovery of the economy faces multiple risks in 2022, starting with the force that continues to dominate daily life: the covid-19 pandemic.
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US stocks tumble and oil plummets as storm clouds gather over the world economy
What would the economic event of 2021 be?
1:45
The US economy has momentum, but the covid does not go away
The hope is that the omicron variant is spreading so rapidly that it burns out, making its impact short-lived.
But what if this latest wave holds up long enough to dent consumer demand, especially in COVID-sensitive sectors like travel and restaurants?
"The pandemic remains the biggest potential disruptor to the national and global economy," said Joe Brusuelas, chief economist at RSM.
The biggest risk is that an even more threatening variant will emerge, with more severe symptoms and the danger of avoiding vaccines and booster doses.
Wall Street doesn't seem to care about these two risks, at least not lately.
All-time highs in the stock market suggest investors are betting that neither omicron nor another variant will prove problematic.
"I hope they are right," said David Kotok, chief investment officer at Cumberland Advisors.
"This is a mutant disease. We now have two years of experience. What makes anyone think omicron is the ultimate?"
Supply chains are still in turmoil
The omicron variant came just as stressed supply chains - one of the biggest drivers of inflation - were beginning to show glimmers of hope.
The delta variant earlier this year put additional pressure on supply chains by making workers sick, scaring them from going to work and introducing new health restrictions.
It is too early to say whether the same will happen now in the factories, ports and transportation companies that keep the economy booming.
"It is possible that omicron will disrupt supply chains even more and will be a drag on growth and investment," said Vincent Reinhart, a former Federal Reserve official who is now chief economist at BNY Mellon.
The good news is that the omicron wave is coming at a time when demand is generally cooling off, which should give supply chains a bit of extra headroom to cope with the new variant.
What should we expect from inflation in the US?
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Inflation remains high
Consumer prices rose at the fastest rate in 39 years in November, driving up the cost of living for families.
Goldman Sachs expects inflation to warm up a bit more in the coming months, before cooling down considerably later in 2022.
One risk is that new covid-related bottlenecks will limit supply, driving prices even higher.
Another concern is that inflation continues to spread and become even more ingrained in the psychology of consumers and business owners, which in turn could cause a negative feedback loop that drives inflation higher.
High energy prices have been at the center of the inflation peak, especially prices at the pump.
Another spike in oil prices, as some on Wall Street have been calling for, would darken the outlook for inflation.
A policy mistake by the Fed
After nearly two years of unprecedented support, the Federal Reserve is finally taking its foot off the gas and preparing to hit the brakes very soon.
In an attempt to fight inflation, the Fed plans to end its stimulus program for buying bonds around March and has forecast three increases in interest rates for next year.
Given the strength of the recovery, the economy should be able to absorb these rate hikes without negative repercussions.
Borrowing costs will remain historically low.
"My feeling is that the economy is in a pretty good place right now. The Fed has a lot of bandwidth to work with," said RSM's Brusuelas.
Investors tend to agree, and markets are confident that the Fed will deftly pull itself out of emergency mode without damaging side effects.
But there is a possibility that the Fed will go overboard by raising rates faster than the economy or financial markets can bear.
And that could seriously slow down or even end the recovery.
Is the action of the Fed correct?
1:57
No more help from Uncle Sam
After providing nearly $ 6 trillion in covid relief during the first two years of the pandemic, federal support for the economy is projected to slow dramatically in 2022.
That was always going to be the case, but the trend will be more pronounced given the apparent demise of the Better Reconstruction Act, including the improved child tax credit.
"We are going to run an experiment on how much of this strong expansion is due to fiscal support and how much is due to private activity," Reinhart said.
"We do not know".
The unexpected
Any list of risks to the economy should include unforeseen events that few expect but could still have a big impact.
The best example would be a massive cyber attack that triggers upheaval, either in the real economy or in the financial markets, or both.
The Colonial Pipeline hack earlier this year showed how vulnerable critical infrastructure is to cyber threat.
A recent report by JPMorgan's International Council warned that cybernetics is "the most dangerous weapon in the world, politically, economically and militarily."
Fed Chairman Jerome Powell was openly concerned earlier this month about the potential impact of a cyber intrusion that could bring down a large bank or a key piece of the financial system.
There are countless other wild card risks beyond cyber, from war and natural disaster to a collapse in the cryptocurrency market.
"You have to be humble. Hardly anyone had a pandemic on the radar screen in 2018 and maybe not in 2019," Reinhart said.
"Is it possible in 12 months that everything we talk about is something we are not talking about now? Yes."
Inflation