The global economy recovered from the historic recession caused by the Covid-19 crisis better than many economists expected in 2021, but faces a more difficult path in the coming year, forecasters warn.
Progress will depend on the virulence of the pandemic, the ease with which inflation is tamed, and the distribution of economic damage across countries and industries, they said, warning of an increasing risk of monetary and fiscal error as governments and Central banks are trying to find answers.
“The slight part of this uneven recovery in the global economy seems to be over,” said Daan Struyven, senior global economist at Goldman Sachs.
Janet Henry, chief economist at HSBC, said the outcome was unlikely to be a “Goldilocks” scenario – not too hot and not too cold.
Most economists agree that the backdrop of a strong recovery combined with high inflation will make it difficult to maintain a balance between supply and demand in most countries.
Simon MacAdam, Senior Global Economist at Capital Economics, said that while headline inflation rates are certain to fall, there will be continued price pressures due to tight labor markets, particularly in the US, and “product shortages and high transportation costs” “in most countries.
Nomura economists are confident that monetary authorities will get inflation under control, but it will come at a price. “At the end of 2022 we will see a completely different background, with stagnation being a greater risk than stagflation,” they warned.
The OECD expects global output growth to slow from 5.6 percent in 2021 to 4.5 percent this year and inflation to rise from 3.5 percent to 4.2 percent, with the peak in the first few months of the year is achieved.
Economists agree that the main uncertainties about the outlook for the coming year stem from the events of the past 12 months. A better-than-expected recovery and a shift in the spending pattern from services to goods raised prices and showed that consumer willingness to buy exceeded businesses’ ability to deliver.
Coronavirus vaccines allowed the restrictions and policy incentives that were driving consumer spending to be quickly eased so the world could “end the year in a better place than we expected a year ago,” said Henry.
What happens in 2022 depends on three interrelated forces.
The severity of the pandemic is important for the willingness of people and companies to spend as well as for state mobility restrictions, which are becoming more acute across Europe.
“The global economy continues to be swept away by the ups and downs of the pandemic,” said Jay H Bryson, Wells Fargo chief economist. Although households, businesses and countries are much better able to adapt to the coronavirus waves, the latest variant of Omicron shows that it can still damage the confidence and economic activity of consumers and businesses.
Tamara Basic Vasiljev, senior economist at Oxford Economics, noted that Omicron has been undermining consumer sentiment around the world in recent weeks. However, given that sentiment is still relatively high and household finances are strong, it is not expected to have a major impact on global economic activity.
“The global economy will manage to navigate the rough waters of the Omicron variant,” she said. The great uncertainty is whether there will be more waves.
The second major uncertainty arises from the imbalance between global supply and demand, which led to inflation in 2021.
Economists expect that the headline rate will fall – among other things because of the statistical effect of the high rates of last year on the annual accounts and because no further oil and energy price increases are to be expected.
The question is whether price pressures will ease enough that central banks don’t take rigorous measures to lower inflation that could jeopardize the recovery.
“During the year [supply] Scarcity should subside and its inflationary impact should subside, albeit with a delay, ”said MacAdam of Capital Economics. He fears, however, that the US labor market is overheating and the Federal Reserve could be mistaken by being too careful.
“We doubt the extent of the tightening signaled by the Fed will be enough to bring core inflation down to 2 percent,” he added.
The third big problem for the global economy in 2022 arises from the differences between countries and industries in the ability to recover from the crisis.
Spain, Thailand and Indonesia have fallen the furthest behind their economies’ expected trajectory due to the pandemic, with Turkey, Taiwan and China the furthest ahead, according to research by Goldman Sachs.
Much of this, Struyven said, is due to the extent to which countries have been exposed to sectors that have been affected or benefited from shifts in demand; For example, manufacturing has seen very high demand, while travel and tourism-dependent locations have suffered major damage.
“The services, where spending remains particularly low in many economies, are generally either associated with high virus risk such as spectator events and international travel, or associated with office work such as ground transportation or dry cleaning,” Struyven said.
For countries that specialize in these services, profits would depend on “significant medical improvements” to combat the pandemic.
Because of these fundamental uncertainties, the course of monetary and fiscal policy could either lead to further inflationary pressures if the stimulus is too strong, or to stagnation if the recovery is not adequately supported.
According to Henry at HSBC, “things are still very far from normal”.