World economy in 2022: the big factors to watch closely

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Will 2022 be the year the global economy recovers from the pandemic? That’s the big question on everyone’s lips as the festive break draws to a close.

One complicating factor is that most of the latest major predictions were released in the weeks before the omicron variant swept the world. At that time, the mood was that the recovery was well and truly upon us, with the IMF projecting 4.9% growth in 2022 and the OECD projecting 4.5%. These numbers are lower than the global growth of around 5% to 6% that is expected to be achieved in 2021, but it represents the inevitable rebound of reopening from the pandemic lows of 2020.

So what difference will omicron make for the state of the economy? We already know this had an effect as Christmas approached, for example British hospitality took a hit as people stayed away from restaurants. For the coming months, the combination of increased restrictions, cautious consumers and people on sick leave is expected to wreak havoc.

Still, the fact that the new variant looks smoother than originally feared probably means the restrictions are lifted faster and the economic effect is more subdued than it could have been. . Israel and Australia, for example, are already easing restrictions despite a high number of cases. At the same time, however, until the West tackles very low vaccination rates in parts of the world, don’t be surprised if another new variant causes further damage to public health and to people. the global economy.

As it stands, the UK think tank Center for Economics and Business Research (CEBR) released a more recent 2022 forecast just before Christmas. He predicted that global growth would reach 4% this year and that the total world economy would hit a new all-time high of 100,000 billion US dollars (74 trillion pounds sterling).

The question of inflation

Another big unknown is inflation. In 2021, we have witnessed a sudden and sharp rise in inflation resulting from the recovery of global economic activity and bottlenecks in the global supply chain. There has been a lot of debate about whether this inflation will be temporary, and central banks have come under pressure to ensure it does not escalate.

So far, the European Central Bank, the Federal Reserve and the Bank of Japan have all refrained from raising interest rates from their very low levels. The Bank of England, meanwhile, followed the advice of the IMF and raised rates from 0.1% to 0.25% in December. It is too little to curb inflation or do anything good besides increasing the cost of borrowing for businesses and increasing mortgage payments for households. That said, markets are betting that more UK rate hikes will follow and that the Fed will also start raising rates in the spring.

Yet the most important question about inflation is what happens to quantitative easing (QE). It is the policy of increasing the money supply that has seen major central banks purchase some US $ 25 trillion in government bonds and other financial assets in recent years, including around US $ 9 trillion. Americans thanks to COVID.

The Fed and the ECB continue to QE and add assets to their balance sheets every month. The Fed is currently lowering the rate on these purchases with a view to halting them in March, after recently announcing that it would bring forward the end date of June. The ECB also announced that it would cut QE, but vowed to continue for now.

Of course, the real question is, what are these central banks doing in practice? The end of QE and rising interest rates will undoubtedly hamper the recovery – the CEBR forecast, for example, assumes that the bond, stock and real estate markets will fall by 10-25% in 2022. It will be interesting to see if the prospect of such upheavals forces the Fed and Bank of England to become more dovish again – especially when you factor in the lingering uncertainty around COVID.

Global Politics and Trade

The trade war between the United States and China is expected to continue in 2022. The “phase 1” agreement between the two countries, in which China had agreed to increase its purchases of certain American goods and services by 200 billion of US dollars over 2020 and 2021 missed its target by around 40% (as of end of November).

The deal has now expired, and the big question for international trade in 2022 is whether there will be a new “phase 2” deal. It’s hard to feel particularly optimistic here: Donald Trump may have been out of office a long time ago, but America’s strategy towards China remains distinctly Trumpian, with no notable concessions offered to the Chinese under Joe. Biden.

Elsewhere, Western tensions with Russia over Ukraine and a further escalation of economic sanctions against Putin may have economic consequences for the global economy, especially given Europe’s dependence on the United States. Russian gas. The more engagement we see on both fronts over the next few months, the better for growth.

Whatever happens politically, it is clear that Asia will be very important for the growth prospects in 2022. Major economies such as the UK, Japan and the Eurozone were all even smaller than before the pandemic in the third quarter of 2021, the latest data available. The United States is the only large developed economy that has already recovered from its losses and regained its pre-COVID size.

Economic growth by country since 2015

OECD data

On the other hand, China has handled the pandemic well – albeit with tight control measures – and its economy has experienced strong growth since the second quarter of 2020. It is grappling with a heavily over-leveraged real estate market, but seems to have handled these issues relatively smoothly. While the jury is still out on how much of China’s debt problems will be a drag in 2022, some, like Morgan Stanley, argue that strong exports, accommodating monetary and fiscal policies are a relief for the real estate sector and a slightly more relaxed approach to carbon reduction indicates decent performance.

As for India, whose economy experienced a double dip during the pandemic, it is showing a strong positive trend with an expected growth of 8.5% for the coming year. So I suspect that emerging Asia will support global growth in 2022 and that the global economic center of gravity will continue to move east at an accelerated pace.

The conversation

Muhammad Ali Nasir is not working, consulting, owning stock, or receiving funding from any company or organization that would benefit from this article, and has not disclosed any relevant affiliation beyond his academic position.

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