Prospects for 2022 are bright, as the global economy recovers from the COVID-19 pandemic and loss of economic activity associated with the shutdowns of key economic drivers, aimed to slow the spread of the disease.
COVID and the economic responses are very much still with us. The Omicron variant is causing human casualties directly and economic impacts by closing ports in China and hampering business activity by slowing the re-opening of service industries. Some of the side-effects of the pandemic, such as progress towards balancing the supply chains, which in turn is feeding inflation, have been slowed by the return of the virus. Many of the different outlooks for the global economy vary by projections of the impact of the virus and its impact on business activity. How that all plays out will be a major theme for 2022.
As measured by the World Bank, the global economy grew at a strong 5.5% pace in 2021, the strongest post-recession pace in 80 years. The strength of the economic recovery was largely created by the extraordinary efforts of various fiscal and monetary authorities. The removal of the stimulus will have a significant impact on the strength and velocity of the global economic recovery. Real global GDP growth is now projected to grow 4.1% in 2022 and 3.2% in 2023, as pent-up demand is exhausted and any lingering supportive macroeconomic support policies are unwound. Included in the projections are continued COVID-19 flareups and slow progress towards balancing the world’s supply chains. These negative assumptions assume that growth slows as infections climb but rebound quickly as infections fade.
Early data from the United States seems to point that its economy will follow that pattern. The New York Fed’s” Empire Stat” index on current business conditions plunged 32.6 points to a reading of -0.7 this month, the first negative reading since July 2020. Manufacturers reported a sharp decline in orders, where the new orders index fell 32 points to -5.0. There were decreases in shipments and unfilled orders, but not on the same magnitude as the drop in new orders. Factories still reported long lead times for supplies to be delivered, keeping prices elevated. Manufacturers remained generally optimistic, the index for future business conditions only dipped 1.3 points to 35.1 in January and the capital expenditures index climbed 2 points to 39.7, a multi-year high. The fact that manufacturers see the slowdown as “temporary” is important and they are not canceling capital investment plans.
The other early look at January activity was the NAHB index, which fell one point in January to 83, with higher prices for building materials and uncertain delivery times for key inputs a chief concern. Demand seems to remain intact, even as interest rates increase, as housing starts advanced 1.4% in December and permits jumped 9.1%. Inflation, supply chain performance, and labor shortages are the number one problem for builders. Mortgage rates are going up, as the bond market prices-in the projected rise in the funds rate by the Federal Reserve this year. Most industry analysts project that the supply chains will see progress this year and that although prices will continue to rise, inflation is slowing. The real view is that economic growth will continue to grow, although slowed by COVID and its overall track will reflect a return to a more normal trend. Near-term risks are COVID but that is likely to be temporary, and inflation. Taking away inflation’s fire involves righting the supply chain balance before central banks feel compelled to go too far. The real risk of recession lies in 2023, as the real effects of increasing interest rates meet the slowing economies. Landings are rarely smooth.
Most economists expect 2022 to be an inflection year, as the global economy continues to recover from the pandemic. While down from 2021, global growth is likely to remain above trend and that strength will let central banks remove accommodative policies and start to tighten monetary policies. The shift in monetary policy should reduce some liquidity from the marketplace but not have a significant effect on economic activity. BMO Economics projected real GDP growth of 4.5% for 2022 and 4.0% for 2023. Economists at Bank of America see 2022 as a balancing act. They are not expecting the global economy to find an equilibrium, but to make progress. They expect real GDP growth for the U.S. to hit 4% in 2022, but with most of the activity in the first half of the year. Economists at Invesco are also looking for solid activity in 2022, especially in the first half of the year.
One of the reasons supporting the view of an above-trend 2022 is the condition of the consumer. Cash is still going to flow in 2022 as consumers have high savings accounts and wage growth is strong. The biggest risk is inflation and falling purchasing power. The latest U.S. retail sales report suggests that higher prices are starting to affect spending. Also, politics and government policy could de-rail confidence. Joe Biden’s Build Back Better legislation seems to be on the ropes and uncertainty does erode confidence. Some economists lowered their GDP forecasts by a full percent to half a percent on the news the BBB bill was in limbo. Most economists expect inflation to slow but if supply chains problems persist and if inflation becomes more entrenched, the Fed and other central banks may move more forcefully. Most analysts are calculating three-to-four quarter-point interest rate increases for 2022. More significant moves could lead to loss of confidence and potential future recessions.
A survey of top global CEOs revealed that confidence is at 10-year highs about concerns for a stronger economy, with 77% of CEOs predicting a stronger economy in the coming year, while only 15% expect worse conditions. Cyber and health risks were viewed as the leading global threats, identified by 49% and 48% of CEOs, respectively. Not far behind is macroeconomic volatility, with 43% of CEOs either very or extremely concerned about the level of inflation. CEOs are also concerned about attracting and retaining talent. Extreme weather is a major concern but in light of the U.N.’s CPOP26 climate change conference, some of the worries about inaction have changed. Only one-third of CEOs made climate change a top concern for this year, as companies have made commitments to achieve climate goals. Some CEOs pointed out space as the next problem facing the world’s business leaders. The prospect of 70,000 satellite launches in coming decades, in addition to space tourism, raises the risk of collisions and increasing debris in s[ace and a lack of regulation. Who owns space will be a theme in 2022.
2022 will be like most years. Expectations are optimistic early in the year and end up with a more settled view as the year unfolds. The global economy will move on in recovery mode, but start to transition to a higher interest rate, less stimulus future. Headwinds include inflation, COVID infections, and possibly incorrect government policy. We have hopes that some of the results created by the pandemic, like inflation and supply chain bottlenecks will fade as the year unfolds. We even think COVID will fade to be a more or less neutral thing in terms of human lives and economic consequences.