Sunday, January 16

World economy: big factors to watch closely in 2022

Will 2022 be the year the world economy recovers from the pandemic? That’s the big question on everyone’s lips when the holiday break comes to an end.

Complicating the situation is that most of the latest major forecasts were released in the weeks leading up to the omicron variant swept the world. At the time, the mood was that recovery was just around the corner, 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% expected to have been achieved in 2021, but that represents the inevitable re-opening rebound after the pandemic lows of 2020.

So what difference will omicron make to the state of the economy?

We already know that it had an effect in the run-up to Christmas, with, for example, UK Hospitality taking a hit because people stayed away from restaurants. Over the next several months, the combination of high restrictions, cautious consumers and people on sick leave is likely to take its toll.

However, the fact that the new variant appears softer than initially feared probably means that the restrictions are lifted more quickly and that the economic effect is more moderate than it could have been.

Israel Y AustraliaFor example, they are already loosening restrictions despite the high number of cases. At the same time, however, until the west tackles very low vaccination rates In some parts of the world, don’t be surprised if another new variant does more harm to both public health and the world economy.

As it stands, the UK thinktank, the Center for Business and Economic Research (CEBR), published a Forecast 2022 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 trillion (£ 74 trillion).

The question of inflation

Another big unknown is inflation. In 2021, we saw a sudden and sharp rise in inflation as a result of the reestablishment of global economic activity and bottlenecks in the global supply chain. Has been much debate on whether this inflation will prove temporary, and central banks have been under pressure to ensure that it does not skyrocket.

Until now, the European Central Bank, the Federal Reserve and the Bank of Japan have refrained from raising interest rates from their very low levels. The Bank of England, on the other hand, followed the The IMF Council Y high fees from 0.1% to 0.25% in December. This is very little to curb inflation or do any good other than driving up the cost of borrowing for businesses and increasing mortgage payments for homes. That said, the the markets are betting that further rate hikes will follow in the UK, and that the Federal Reserve It will also start raising rates in the spring.

However, the bigger question regarding inflation is what happens to quantitative easing (QE).

This is the policy of increasing the money supply that the main central banks have seen. buying some $ 25 trillion in government bonds and other financial assets in recent years, including about $ 9 trillion in the back of Covid.

Both the Fed and the ECB are still running QE and adding assets to their balance sheets every month. The Fed is currently declining the pace of these purchases with a view to stopping them in March, having recently announced that it would advance the completion date from June. The ECB He has also said that he will reduce QE, but has vowed to continue for now.

Of course, the real question is what these central banks do in practice. Ending QE and raising interest rates will undoubtedly hamper the recovery: the CEBR forecastFor example, it assumes that bond, equity and property markets will fall by 10-25% in 2022. It will be interesting to see if the prospect of such a disruption forces the Fed and the Bank of England to become more dovish again. particularly when the continued uncertainty surrounding Covid is taken into account.

Politics and global trade

The trade war between the United States and China is likely to continue in 2022.

The ‘Phase 1The agreement between the two nations, in which China had agreed to increase its purchases of certain American goods and services by a combined $ 200 billion during 2020 and 2021, has not met its target. by about 40% (at the end of November).

The deal has 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 left office a long time ago, but America’s strategy on China remains. clearly Trumpian, with no notable concessions being offered to the Chinese under Joe Biden.

Elsewhere, Western tensions with Russia over Ukraine and further escalation of economic sanctions against Putin may have economic consequences for the world economy, mostly due to Europe’s dependence on Russian gas. The more engagement we see on both fronts in the coming months, the better it will be for growth.

Whatever happens politically, it is clear that Asia will be very important for growth prospects in 2022.

Big economies like the United Kingdom, Japan and the eurozone they were even smaller than before the pandemic as recently as the third quarter of 2021, the latest data available. The only large developed economy that has already recouped its losses and regained its pre-Covid size is the United States.

Economic growth by country since 2015

Source: OECD data

On the other hand, China has handled the pandemic good, although with strict control measures, and its economy has achieved strong growth since the second quarter of 2020. Fighting with a very over-indebted housing market, but it seems to have handled these problems relatively smoothly. Although the jury is out on the extent to which China debt problems will be a drag in 2022, some like Morgan Stanley argue that Strong exports, accommodative monetary and fiscal policies, relief for the real estate sector and a slightly more relaxed approach to carbon reduction point to a decent performance.

As for India, whose economy has experienced a double decline during the pandemic, it is showing a strong positive trend with 8.5% expected growth in the next year. Therefore, I suspect that emerging Asia will take on global growth in 2022, and the world economic center of gravity it will continue to move eastward at an accelerated rate.The conversation

Muhammad Ali Nasir, Associate Professor of Economics and Finance, Huddersfield University

This article is republished from The conversation under a Creative Commons license. Read the Original article.

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