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The world economy in 2022: growth in a pond full of piranhas

In the eighties of the last century, the books of the literary series became fashionable among children and adolescents Choose your own adventure . After an introduction to the events, the reader was offered the possibility of deciding between different options that determined the actions that the protagonist undertook. The story therefore had different endings depending on the paths chosen. This random component that the books had is also present in the economic forecast reports for 2022 that in recent weeks have been published by different public and private organizations. The base scenario is that the next one will be another course with significant economic growth. However, the variables that could derail that roadmap are accumulating. The two main risks right now are the effects of omicron on activity and inflationary pressure, which, far from subsiding, threatens to stay with us longer than expected. This is what is expected of the world economy in 2022.

Growth

The year that is about to end has been magnificent from the point of view of economic growth . After the shock produced by the outbreak of the coronavirus in March 2020, which plunged the planet into a severe recession, the recovery came in 2021 thanks to an unprecedented battery of fiscal and monetary stimuli. The latest forecasts from the International Monetary Fund (October) place the improvement in world GDP at 5.9%, the highest rate in decades. The progress of the economy would have been even greater had it not been held back by bottlenecks in supply chains as of the summer.

In 2022, the consensus forecast is for growth to continue the phase deceleration that began a semester ago, but that remains at rates still above those obtained in the years prior to the covid. The IMF, for example, places the rise in world GDP at 4.9%. Economies will have to gradually get used to operating without so much liquidity in the system. “We believe that 2022 will be a year of two halves. In the first part, growth will be above average, followed by a normalization of activity rates as the reopening of economies is completed, excess savings generated during the pandemic are spent and extraordinary stimulus measures are keep retiring, ”explains Mark Haefele, UBS Global Investment Manager. Regarding the evolution by regions, the Swiss bank believes that we will also witness a divergence, “with developed economies growing well above emerging economies in the first half of the year, so that developing countries will then recover a greater dynamism than the big ones. ”

Along with aid packages from governments and central banks, the other great catalyst for economic recovery in 2021 has been the arrival of the first vaccines against the coronavirus. The immunization of a large part of the world's population – especially in developed countries – allowed the reopening of economies and some normalization in sectors such as transport and tourism. However, the arrival of a new variant (omicron) at the end of November has once again generated uncertainty. Although it is very difficult to return to severe confinements such as those experienced between March and April 2020, some countries have begun to enact restrictions due to the alarming increase in the rate of infections. The evolution of the pandemic, therefore, will be one of the main uncertainties for the economy in the short and medium term, although experts trust that the worst is behind us. “There are good reasons to be optimistic about the evolution of the pandemic in 2022. Improved vaccines to deal with the virus will spread globally. At the same time, the development of antiviral pills can drastically decrease the number of hospitalizations, ”says Henry Allen, analyst at Deutsche Bank.

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In the baseline scenario drawn by experts, China would continue to lead world growth, although in a sharp slowdown compared to previous years, while the differential in activity between the US and the euro zone should close to advance at similar speeds (between 4% and 4, 5%). In the case of Europe, an acceleration of growth is expected in Germany and Spain. After disappointing in 2021, Spain should be one of the countries that leads the growth in the EU, although the forecasts continue to be low. The latest cut comes from the IMF: it now places GDP growth in 2022 at 5.8%, when last autumn it forecast 6.4%.

Inflation

After the Great Recession, prices went off the economic radar, they were no longer a problem, allowing central banks to pump money into the markets and lower interest rates to unknown areas without fear of an inflationary spike. It was argued then that demographic trends such as the aging of the population or the technological revolution, with the boom of electronic commerce at the fore, were lighting a new era of low prices.

This situation, however, has experienced a Unexpected turn in 2021. The combination of higher energy prices, spurred in part by the transition to a more sustainable model, bottlenecks in global product transport, and inability to supply (many factories reduced their inventories to a minimum after coronavirus) to meet the strong rebound in global demand that arose with the economic recovery have resulted in the awakening of inflation in most economies. In the US, for example, prices last November rose by 6.8% year-on-year, the highest record for the country's CPI in 39 years.

Inflation is the risk factor that experts fear most in 2022. The consensus of analysts considers that the pressures will continue, and they do not rule out that inflation forecasts will have to be corrected upwards depending on how events develop. Of the factors that are driving prices up, the one that is seen as the most cyclical is related to dysfunctions in global supply chains. “The bottlenecks should be solved between spring and summer of next year,” says Joaquín García Huerga, director of global strategy at BBVA Asset Management.

However , there are more doubts about when energy prices will relax. As Allianz experts recall in their 2022 strategy report, the fight against climate change will likely continue to spur inflation. “The increase in the prices of carbon dioxide rights and the economic adjustments necessary for a green economy will probably raise costs initially, although they can be expected to favor growth and the planet in the long term,” says the German financial group. The other element that can lengthen inflationary tensions is the wage policy in those labor markets, such as the United States, close to full employment.

“We are not clear that the consumers can cope with the strong inflation of energy, housing and many other products once the savings generated during the pandemic have ended, ”warns Víctor Peiro, director of analysis at GVC Gaesco.

President from the United States Federal Reserve, Jerome Powell ERIC BARADAT (AFP)

Interest rates

The reaction of central banks after The explosion of the Covid in March 2020 was clear: the liquidity tap is ruthlessly opened to sustain the economies. The main monetary organizations kept interest rates close to zero and issued a blank check to States and companies with the purchase of debt in the markets to alleviate the cost of their financing. Even the European Central Bank (ECB) abandoned dogmatic tics of the Great Recession given the gravity of the situation.

The initial plan was to start draining those stimuli from 2022 in a progressive way so as not to damage the economic recovery. The strong rise in inflation, however, is putting pressure to accelerate the turn in monetary policy. As investors like to have predictability on the horizon, central banks, aware of the importance of communicating with the market, have taken advantage of their last meetings of the year to set the path their decisions will take in 2022. What It seems clear is that the world will once again live a monetary epoch of various speeds, because not all regions will normalize their policies with the same voltage. “We will see a persistent divergence in the policy of the world's central banks as their leaders try to balance price pressures while sustaining economic growth. As usual, the US Federal Reserve will take center stage, and the timing and nature of its interventions will have a significant impact on the market, ”explains Ritu Vohora, analyst at the manager T. Rowe Price.

The first to press the red button was the Bank of England, which at its December meeting agreed to raise interest rates to 0.25% from 0.1 % after knowing the inflation of November (5.1%). The market expects up to three additional hikes in the UK next year. The Federal Reserve has also been ambitious in its roadmap: in January it will cut the debt purchase program in half to end it in March 2022. From there it will begin to raise rates. The body chaired by Jerome Powell foresees up to three increases throughout the year in the face of a price hike that he no longer sees temporary, but “generalized.”

Instead , the ECB prefers to be more careful. It is true that inflation in the euro area is high (4.9%), but its component is more temporary and the recovery still needs some assisted breathing to consolidate. For this reason, the president of the organization, Christine Lagarde, announced last week that they will reduce the purchase of debt over the next year. From the current 80,000 million euros it will drop to 20,000 million in October. However, the ECB does not contemplate, except for an unexpected script twist, to raise the price of money in 2022.

Some experts believe that the withdrawal of stimuli will be the test of cotton to gauge the real strength of the economic recovery and its sustainability, since this has been mainly due to the millionaire monetary and fiscal programs. “The withdrawal of stimuli will show the weaknesses of the economies sooner than the markets expect, preventing interest rates from rising,” says Ricardo Gil, head of asset distribution at TREA AM.

Foreign exchange

The expected divergence in central bank policies will have an impact on the behavior of the world's main currencies. In 2021, the dollar has appreciated significantly against the euro, going from trading at 1.2 dollars per euro to levels close to 1.13 dollars. As the Federal Reserve will be ahead in the rate hikes, experts believe that the weakness of the European currency against the greenback will continue or even be accentuated throughout the next year.

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