New Delhi: The Covid years are littered with predictions that have not worked. For anyone looking to 2022, that should be enough to give you pause.
Most forecasters, including Bloomberg Economics, base their scenario on a robust recovery with prices cooling and an abandonment of emergency monetary policy settings. What could possibly go wrong? Many.
Omicron, persistent inflation, Fed take off, Evergrande collapse in China, Taiwan, rush to emerging markets, hard Brexit, new euro crisis and rising food prices in a powder Middle East – all of it figure in a gallery of risk thugs.
Some things could also turn out better than expected, of course. Governments can choose to keep tax support in place. China’s latest five-year plan could catalyze larger investments. Pandemic savings could fund global spending madness.
Omicron and more interlocks
It is early for a final verdict on the omicron variant of Covid-19. Apparently more contagious than its predecessors, it can also prove to be less fatal. It would help the world get back to something like normal before the pandemic – which means spending more money on services. Covid lockdowns and caution have kept people out of gyms or restaurants, for example, and encouraged them to buy more things instead. A rebalancing of spending could push global growth to 5.1% from Bloomberg Economics’ baseline forecast of 4.7%.
But we may not have that chance. A more contagious and deadly variant would weigh on savings. Even a three-month return to the tightest restrictions of 2021 – countries like the UK have already moved in that direction – could see 2022 growth slow to 4.2%.
In this scenario, demand would be weaker and supply problems around the world would likely persist as workers were left out of labor markets and further increases in logistics. Already this month, the Chinese city of Ningbo – home to one of the busiest ports in the world – experienced further closures.
The threat of inflation
In early 2021, the United States is expected to end the year with 2% inflation. Instead, it’s close to 7%. In 2022, again, the consensus expects inflation to end the year near target levels. Another major misfire is possible.
Omicron is only one potential cause. Wages, which are already growing at a rapid pace in the United States, could climb higher. Tensions between Russia and Ukraine could push gas prices up. As climate change results in more disruptive weather events, food prices may continue to rise.
All the risks do not go in the same direction. A new wave of viruses could hit travel, for example – lowering oil prices. Even so, the combined impact could still be a stagflationary shock that would not leave easy answers to the Fed and other central banks.
Powell-ing towards a Fed rate hike
Recent history, from the taper tantrum of 2013 to the stock selloff of 2018, shows how a Fed tightening is causing problems for markets.
This time around, already high asset prices add to the risks. The S&P 500 Index is close to bubble territory, and the acceleration in house prices moving away from rents suggests that the risks in the housing market are greater than at any time since the subprime crisis in 2007.
Bloomberg Economics modeled what would happen if the Fed made three hikes in 2022 and signaled that it would continue until rates hit 2.5%, pushing Treasury yields higher and credit spreads higher. wide. The result: a recession in early 2023.
The Fed takes off and emerging markets
The Fed’s take-off could mean a hard landing for emerging markets. Higher U.S. rates usually boost the dollar and trigger capital outflows – and sometimes currency crises – in developing economies.
Some are more vulnerable than others. In 2013 and 2018, Argentina, South Africa and Turkey suffered the most. Add Brazil and Egypt – call them BEASTS – to get a list of the five at-risk economies in 2022, based on a series of metrics compiled by Bloomberg Economics.
Saudi Arabia, Russia and Taiwan, with little debt and strong current account balances, appear to be the least exposed to capital flight in the emerging world.
China could strike a great wall
In the third quarter of 2021, the Chinese economy came to a halt. The accumulated weight of the Evergrande property crisis, repeated Covid lockdowns and energy shortages have pushed annualized economic growth down to 0.8% – well below the 6% pace the world has become accustomed to .
While the energy crisis is expected to subside in 2022, the other two issues may not. Beijing’s zero Covid strategy could mean omicron lockdowns. And with weak demand and limited funding, housing construction – which accounts for around 25% of China’s economy – may have to decline further.
Bloomberg Economics’ baseline scenario predicts China’s growth of 5.7% in 2022. A slowdown to 3% would send ripples around the world, leaving commodity exporters short of buyers and potentially derailing markets. the Fed’s plans, just like the Chinese stock market crash did in 2015.
Political unrest in Europe
The solidarity between the leaders who support the European project and the activism of the European Central Bank to bring the borrowing costs of governments under control have helped Europe overcome the Covid crisis. In the coming year, the two could fade away.
A fight for the Italian presidency in January could upset the fragile coalition in Rome. France will go to the polls in April with President Emmanuel Macron facing the challenges of the right. If Eurosceptics gain power in the bloc’s key economies, it could break the calm in European bond markets and deprive the ECB of the political support needed to respond.
Suppose sovereign spreads widen by 300 basis points, as they did during the debt crisis of the past decade. Bloomberg Economics’ model shows it could cut economic output by more than 4% by the end of 2022, plunging the eurozone into recession and rekindling concerns about its sustainability.
Feel the impact of Brexit
UK-EU negotiations over the Northern Ireland Protocol – a doomed attempt to square the circle of an open land border and a closed customs union – are set to continue until 2022. It will be difficult to answer yes.
What happens if the negotiations fail? Based on past Brexit outbreaks, uncertainty would affect business investment and undermine the pound, boosting inflation and eroding real incomes.
In an all-out trade war, tariff and transportation bottlenecks could drive prices even higher.
The future of fiscal policy
Governments have spent heavily to support workers and businesses during the pandemic. Many now want to tighten their belts. The decline in public spending in 2022 will amount to some 2.5% of global GDP, around five times more than the austerity measures that slowed the recovery from the 2008 crisis, according to UBS estimates.
There are exceptions. Japan’s new government announced another record-breaking stimulus and Chinese authorities signaled a shift towards supporting the economy after a long period of tightening of the market strings.
In the United States, fiscal policy has shifted from stimulating the economy to slowing it down in the second quarter of 2021, according to the Brookings Institution. This is expected to continue next year, although President Joe Biden’s investment plans for childcare and clean energy will limit the drag if they make it to Congress.
Food prices and disorders
Hunger is a historical engine of social unrest. A combination of effects of Covid and inclement weather has pushed global food prices to record highs and could keep them high next year.
The latest food price shock in 2011 sparked popular protests, especially in the Middle East. Many countries in the region remain at risk.
Sudan, Yemen and Lebanon – already under pressure – all appear at least as vulnerable today as they were in 2011, and some are even more so. Egypt is only slightly better off.
Popular uprisings are seldom localized events. The risk of wider regional instability is real.
Political, Geo- or Local
Any escalation between mainland China and Taiwan, from blockade to outright invasion, could attract other world powers, including the United States.
A superpower war is the worst-case scenario, but scenarios aside from that include sanctions that would freeze ties between the world’s two largest economies and a collapse in Taiwanese production of the semiconductors essential to global production of everything, from smartphones to cars.
Elsewhere, Brazil is expected to hold elections in October – amid pandemic turmoil and an economy still depressed. Many things could go wrong, although a victory for a candidate promising tighter control of public funds could provide some relief in the real world.
In Turkey, the opposition is pushing to bring elections forward from 2023 to next year amid a currency crisis largely blamed on the unorthodox economic policies of President Recep Tayyip Erdogan.
What could be going well in 2022?
Not all risks are down. US fiscal policy, for example, could remain more expansionary than it looks right now – pulling the economy off the edge of the fiscal cliff and boosting growth.
Globally, households are sitting on billions of dollars in excess savings, thanks to the pandemic stimulus and forced frugality during the lockdown. If this is spent faster than expected, growth would accelerate.
In China, investments in green energy and affordable housing, already planned in the country’s 14th five-year plan, could boost investments. Asia’s new trade deal, the Regional Comprehensive Economic Partnership – which encompasses 2.3 billion people and 30% of global GDP – could boost exports.
In 2020, pandemic economies were worse than almost any economist had predicted. But that was not true in 2021: In many countries the recoveries were surprisingly fast. It’s a helpful reminder that some things might just as well happen next year.