Interview, Fireside Chat
What’s Ahead for Global Economies and Markets in 2022?
- Global economic growth is projected at approximately 4.5% for 2022, with most economies outperforming long-term trends despite a potential Q1 contraction of up to 2.5 percentage points due to the Omicron variant.
- Economic tailwinds from reopening are expected to fade by 2022, while fiscal policy will shift from supportive to restrictive and monetary policy will transition from accommodative to restrictive, with the U.S. Federal Reserve anticipated to begin tapering asset purchases as early as Q1 2022 and hike rates around mid-2022.
- Inflation is forecast to subside gradually later in 2022, with U.S. and UK core inflation potentially settling between 2% and 2.5% by year-end, while Euro Area core inflation is expected to return below 2%; however, a persistent risk exists if sequential wage growth (currently 5-6%) accelerates inflation further or if inflation settles significantly higher than pre-pandemic levels, such as 50 basis points above the five-year average in 2024.
- Regional economic performances vary, with the Euro Area, India, ASEAN countries, and Russia expected to perform well due to lagging recovery, room for growth, and strong oil prices respectively, whereas China's property market and Brazil's political and financial tightening present significant drag or challenges.
- Financial market dynamics anticipate higher yields and equity valuations in 2022, though bonds are expected to be poor investments over the medium term as rates rise; equity markets face anxiety regarding high valuations and risks of negative responses if inflation remains persistent, while China offers potential fixed income diversification despite complicated equity conditions.
- Key risks include the uncertain trajectory of the pandemic, particularly regarding Omicron's impact on activity, rising political risks such as the U.S. midterms and French presidential election, and the possibility of more aggressive monetary tightening if wage growth persists, which could lead to increased market volatility and growth slowdowns in the second half of the year.
- Structural shifts include pent-up household savings offsetting fiscal headwinds, a reversal of spending from services to durable goods, and a sustained demand for capital driven by government spending on infrastructure and decarbonization, which may keep real rates higher than in the past.
- Long-term rate expectations suggest the U.S. federal funds rate could settle between 2.5% and 2.75% with gradual increases post-2022, while Euro Area rates are not expected to rise until the second half of 2024, creating a divergent path in tightening cycles between developed markets.