The world economy has recovered from the historic recession caused by the Covid-19 crisis better than many economists expected in 2021, but has a harder road ahead in the coming year, forecasters warned.
Progress will depend on the violence of the pandemic, the ease with which inflation is tamed and the spread of economic damage across countries and industries, they said, warning of a rising risk of monetary and fiscal policy errors as governments and central banks try to respond.
“The easy part of this unequal global economic recovery seems to be over,” says Daan Struyven, senior global economist at Goldman Sachs.
Janet Henry, chief economist at HSBC, said it was unlikely the outcome would be a “Goldilocks” scenario – not too hot and not too cold.
Most economists agree that the backdrop in most countries of a strong recovery coupled with high inflation will make it difficult to balance supply and demand.
Simon MacAdam, senior global economist at Capital Economics, said that while headline inflation rates would certainly fall, there was likely to be sustained underlying pressure on prices due to tight labor markets, particularly in the US, and “product shortages and high transportation costs” in most countries.
Economists at Nomura are confident that monetary authorities will get inflation under control, but it will come at a price. “By late 2022, we see a very different background, with stagnation a greater risk than stagflation,” they warned.
The OECD expects global output growth to moderate from 5.6 percent in 2021 to 4.5 percent this year, with inflation rising from 3.5 percent to 4.2 percent, although peaking in the early months of the year.
Economists agree that the main uncertainties about the outlook for the coming year stem from what has happened over the past 12 months. A better-than-expected recovery coupled with a shift in the spending pattern from services to goods has pushed prices up and shown that consumers ‘willingness to buy exceeds companies’ ability to supply.
Coronavirus vaccines have enabled rapid easing of restrictions and policy stimulus has driven consumer spending, enabling the world to end the year “in a better place than we could have expected a year ago,” Henry said. said.
What happens in 2022 will depend on three linked forces.
The severity of the pandemic is important both for the willingness of individuals and companies to spend and for government restrictions on mobility, which in turn are being tightened in Europe.
Jay H Bryson, chief economist at Wells Fargo, said: “The world economy is still plagued by the ups and downs of the pandemic. Although households, companies and countries have become much better at adapting to coronavirus waves, the latest Omicron shows variant that it still has the power to damage consumer and business confidence and economic activity.
Tamara Basic Vasilyev, senior economist at Oxford Economics, noted that Omicron has been undermining consumer sentiment worldwide in recent weeks. But with sentiment still strong at relatively high levels and household finances strong, she does not expect the impact on economic activity to be global.
“The world economy will succeed in navigating the rough waters offered by the Omicron variant,” she said. The big uncertainty is whether there will be more waves.
The second major uncertainty stems from the imbalance between global supply and demand, which created inflation in 2021.
Economists expect the main rate to fall – partly due to the statistical effect of last year’s high rates on the annual calculation, and because oil and energy prices are not expected to rise further.
The question is whether the pressure on prices will decrease sufficiently so that central banks do not take drastic steps to bring down inflation, which could halt the recovery.
“As the year progresses, [supply] deficits should ease and their inflationary effects should also decrease, albeit with a delay, ”MacAdam told Capital Economics. However, he is concerned that the US labor market may overheat and that the Federal Reserve could err by being too cautious.
“We doubt the scale of tightening indicated by the Fed will be enough to pull core inflation down to 2 percent,” he added.
The third major issue for the world economy in 2022 stems from differences between countries and industries in their ability to recover from the crisis.
Spain, Thailand and Indonesia fell the furthest behind their economies’ expected path due to the pandemic, with Turkey, Taiwan and China the furthest ahead, according to Goldman Sachs research.
Many of these, Struyven said, were due to the extent to which countries were exposed to or benefited from sectors affected by shifts; Manufacturing, for example, experienced very high demand while travel and tourism dependent locations suffered major damage.
“The services where spending in many economies remains particularly repressed are generally either associated with high virus risk, such as spectator events and international travel, or linked to office-based work, such as ground transportation or dry cleaners,” Struyven said.
For countries specializing in these services, gains will depend on “significant medical improvements” to combat the pandemic.
As a result of these fundamental uncertainties, the path of monetary and fiscal policy could either lead to further inflationary pressures if too much stimulus is provided, or a dip in stagnation if the recovery receives insufficient support.
According to Henry at HSBC, “things are still very far from normal”.