The omicron variant of Covid-19 appears to be more contagious than its predecessors.
New Delhi: The Covid years were filled with unsuccessful predictions. For anyone looking ahead to 2022, that should be enough of a pause.
Most forecasters, including Bloomberg Economics, see their base case as a strong rebound with cooling prices and a shift away from urgent monetary policy settings. What could happen? A lot of.
Omicron, tough inflation, Fed shutdown, slump in China’s Evergrande, Taiwan, race in emerging markets, hard Brexit, new euro crisis and rising food prices in China East – all of these are in the gallery of risky rogues.
Of course, some things can also go better than expected. Governments may decide to keep financial support in place. China’s latest five-year plan could spur investment more aggressively. Pandemic savings could fund a round of global spending.
Omicron and more Lockdowns
It is too early to have a firm verdict on the omicron variant of Covid-19. While it seems more contagious than its predecessors, it can also be less deadly. That will get the world back to what it was like before the pandemic – which means spending more money on services. For example, the caution of Lockdowns and Covid has prevented people from going to gyms or restaurants, and encouraged them to buy more things. Rebalancing spending could boost global growth to 5.1% versus Bloomberg Economics’ baseline forecast of 4.7%.
But we may not have that luck. A more contagious and deadly variant will drag economies. Even three months back into the harshest of restrictions in 2021 – countries like the UK already moving in that direction – could see 2022 growth slow to 4.2%.
In that scenario, demand would be weaker and the world’s supply problems would likely persist, with workers being excluded from the labor market and a continued logistics boom. This month, the Chinese city of Ningbo – home to one of the world’s busiest ports – experienced new closures.
Threat of inflation
At the beginning of 2021, the US is forecast to end the year with 2% inflation. Instead, it’s closer to 7%. In 2022, again, the consensus expects inflation to end the year near target. Another big miss is possible.
Omicrons are just one potential cause. Wages, which have grown at breakneck speed in the US, could go even higher. Tensions between Russia and Ukraine could cause gas prices to soar. With climate change leading to more destabilizing weather events, food prices could continue to rise.
Not all risks go in the same direction. For example, a new wave of the virus could hit tourism – pulling oil prices down. Even so, the aggregate effect could still be an inflationary shock that leaves the Fed and other central banks with no easy answers.
Support towards Fed rate hike
Recent history, from 2013’s rampage to 2018’s stock sell-off, shows how a tight Fed caused trouble for markets.
Adding to the risk during this time is an already inflated asset price. The S&P 500 index is near bubble territory, and the rapid rise in home prices away from rents suggests a greater housing market risk than at any time since the sub-crisis in early 2007.
Bloomberg Economics modeled what would happen if the Fed made three hikes in 2022 and signaled it would continue until rates hit 2.5%, pushing up Treasury yields and spreading credit Wider. The result: a recession in early 2023.
Fed Liftoff and Emerging Markets
The Fed’s dismantling could mean a crash landing for emerging markets. A higher U.S. exchange rate typically boosts the dollar and triggers capital outflows — and sometimes currency crises — in developing economies.
Some are more vulnerable than others. In 2013 and 2018, Argentina, South Africa and Turkey were hardest hit. Add Brazil and Egypt – call them BEAST – to get a list of five economies at risk in 2022, based on a series of measures compiled by Bloomberg Economics.
Saudi Arabia, Russia and Taiwan, with little debt and strong current account balances, appear to be the least affected by capital outflows in the emerging world.
China can achieve the Great Wall
In the third quarter of 2021, the Chinese economy slowed down. The cumulative weight of the Evergrande property slump, repeated Covid shutdowns and energy shortages have dragged down annual economic growth to 0.8% – well below the 6% pace the world is used to.
While the energy crisis should ease by 2022, the other two may not. Beijing’s zero-Covid strategy could mean omicron lockdown. And with weak demand and limited financing, real estate construction – which accounts for about 25% of China’s economy – is likely to continue to decline.
The base case for Bloomberg Economics is that China will grow 5.7% in 2022. A drop to 3% will cause ripples around the world, leaving commodity exporters short of buyers and potentially costly. the possibility of derailing the Fed’s plan, like the China stock crash that happened in 2015.
Political turmoil in Europe
Solidarity among pro-European project leaders, and the European Central Bank’s drive to control government borrowing costs, have helped Europe weather the Covid crisis. In the coming year, both may fade.
A war for the Italian presidency in January could dent the fragile alliance in Rome. France topped the polls in April with President Emmanuel Macron facing challenges from the right. If euro skeptics gain power in the bloc’s key economies, it could disrupt calm in European bond markets and deprive the ECB of much-needed political support. to meet.
Assume that sovereign spreads widen by 300 basis points, just as they did during the debt crisis of the last decade. Bloomberg’s economic modeling suggests that could cut economic output by more than 4% by the end of 2022, pushing the euro zone into recession and stoking concerns about its viability.
Feel the impact of Brexit
Negotiations between the UK and the EU over the Northern Ireland Protocol – an unlikely attempt to abolish the circle of land borders and a closed customs union – are set to break out in 2022. To get there. will be very difficult.
What if negotiations break down? Based on past Brexit flare-ups, uncertainty will affect business investment and devalue the pound, fueling inflation and eroding real income.
In a full-blown trade war, tariffs and shipping logs could push prices even higher.
The future of fiscal policy
Governments are spending heavily to support workers and businesses during the pandemic. Many people now want to tighten their belts. According to UBS estimates, the reduction in public spending by 2022 will amount to about 2.5% of global GDP, about five times larger than the austerity measures that have slowed the recovery from the crisis. 2008.
There are exceptions. Japan’s new government has announced another record stimulus measure, and Chinese authorities have signaled a move to support the economy after a long period of tight purse strings.
In the US, fiscal policy changed from boosting the economy to slowing the economy in the second quarter of 2021, according to the Brookings Institution. That will continue next year, though President Joe Biden’s plans to invest in clean energy and childcare will limit drag if they pass Congress.
Food prices and unrest
Hunger is a historical cause of social unrest. The combination of the Covid effect and bad weather has pushed world food prices to near record highs and will likely continue to rise next year.
The last food price shock in 2011 caused a popular outcry, especially in the Middle East. Many countries in the region are still exposed.
Sudan, Yemen and Lebanon – already stressed – today at least appear to be as vulnerable as they were in 2011, and some are even more so. Egypt is only slightly better off.
Popular uprisings are rarely localized events. The risk of broader regional instability is real.
Politics, Geography or Locality
Any escalation between mainland China and Taiwan, from blockade to outright invasion, could attract other world powers – including the US.
A superpower war is the worst-case scenario, but the brief scenarios include sanctions that would freeze the relationship between the world’s two largest economies and collapse in quality manufacturing. Taiwan’s semiconductors, which are vital to the global output of everything from smartphones to cars.
In another development, Brazil is scheduled to hold elections in October – amid a chaotic pandemic and a still-slumbering economy. A lot can go wrong, though victory for a candidate that promises tighter control of the public’s purse may offer some relief to the truth.
In Turkey, the opposition is pushing to hold the 2023 elections next year amid a currency plunge many attributed to President Recep Tayyip Erdogan’s unorthodox economic policies.
What could go right in 2022?
Not all risks are downsides. For example, U.S. budgetary policy could remain more expansive than is possible right now – keeping the economy off the edge of the fiscal cliff and boosting growth.
Globally, households are using trillions of dollars in excess savings, thanks to pandemic stimulus measures and enforcement of savings during the shutdown. If that money is spent faster than expected, growth will accelerate.
In China, investments in green energy and affordable housing, already included in the country’s 14th Five-Year Plan, could boost investment. Asia’s new trade deal, the Regional Comprehensive Economic Partnership – covering 2.3 billion people and 30% of global GDP – could boost exports.
In 2020, pandemic economies are much worse than any economist forecasts. But that’s not true in 2021: in many countries the recovery is amazingly quick. It’s a helpful reminder that some things may well happen in the next year, too.
