Nov 30, 2021, 1:43 PM ETInterview, Fireside Chat

What’s Ahead for Global Economies and Markets in 2022?

Global economy growth is forecast at 4.5% for 2022, continuing expansion well above long-term trends despite slowing from the 2021 peak.
Growth deceleration is attributed to the completion of post-COVID reopening boosts, fiscal policy shifting from a tailwind to a headwind, and anticipated monetary tightening.
Optimism remains for 2022 driven by pent-up household savings offsetting fiscal drag, an inventory cycle correction as production lags demand, and continued vaccination efforts.
Pfizer and Merck medications are expected to play a critical role in moving the pandemic behind the global economy.

Advanced Economies:
- The Euro Area is viewed more optimistically than consensus due to a larger output gap and expansionary fiscal policies in Germany and southern European recovery funds.
Emerging Markets (EM):
- India and ASEAN: Forecast positively due to significant room for recovery from the 2021 pandemic shocks.
- Russia: Optimism is driven by sustained high oil prices.
- China: Outlook is below consensus as the property sector acts as a long-term drag, with policymakers prioritizing decarbonization and income distribution over near-term GDP.
  - Annual growth is projected to slow to ~4.8% in 2022 from ~8% in 2021, though sequential growth may accelerate from recent lows.
- Latin America (Brazil): Cautious outlook due to sharp monetary tightening and a politically divisive 2022 election.

Goldman Sachs missed the full extent of 2021 inflation acceleration, particularly regarding durable goods price pressure driven by strong demand and restricted service consumption.
Core inflation forecasts for the end of 2022 have been raised, with expectations of:
- US and UK inflation settling in the 2.0%–2.5% range.
- Euro Area core inflation returning to below 2%.
Inflation normalization is expected by late 2022 as shipping costs decline and spending on durable goods moderates.
Upside Risks: Persistent sequential wage growth of 5%–6% could necessitate further upward revisions to inflation forecasts.

Federal Reserve Tapering:
- Market pricing suggests a potential acceleration in tapering from $15 billion to $30 billion per month.
- Tapering could conclude as early as Q1 2022, preceding the first rate hike.
Rate Hike Timeline:
- First US Fed rate hike is forecast for mid-2022, followed by several additional hikes, with a gradual increase trajectory thereafter.
- US terminal rate is projected at 2.5%–2.75%, approximately 100 basis points above current market pricing.
- Euro Area rate hikes are not expected until the second half of 2024.
Neutral Rate View:
- Current market pricing for terminal rates is deemed "extraordinarily low" given increased public sector demand for capital driven by infrastructure and climate transition spending.
- Inflation is expected to settle ~50 basis points above pre-pandemic averages by 2024 across 40 covered economies.

Equities: High valuations are currently supported by low real yields; persistent inflation could severely test this premise if real yields rise.
Bonds: Yields are expected to rise in 2022, particularly along the middle of the curve, though the path will likely be volatile rather than a single shock.
- Bonds are viewed as poor medium-term investments as real yields normalize.
China Strategy:
- Bonds and FX: Opportunities remain positive due to carry benefits and diversification.
- Equities: Outlook is mixed; while growth is softer, negative policy risks may be priced in, with potential for improvement if regulatory limits become clearer.
Investment Strategy: 2022 is characterized by a "flatter" market profile with increased volatility; market dips driven by inflation or growth fears may present buying opportunities if fundamentals remain resilient.

Omicron Variant: A downside risk involving higher transmissibility could reduce Q1 2022 quarterly growth by ~2.5 percentage points, though economic behavior is adapting to limit impact.
Inflation Persistence: The primary medium-term risk is wage-driven inflation accelerating beyond expectations, forcing more aggressive Fed tightening.
Political and Geopolitical Events:
- High-impact elections in Brazil, the US (midterms), and France (presidential) add uncertainty to fiscal and policy trajectories.
- Commodity supply disruptions remain a constraint on growth.
Forecasting Uncertainty: Unusual economic conditions, including the unique interaction of recovery dynamics and policy shifts, create a high probability of surprises and mid-course corrections by policymakers.