WORLD ECONOMY IN 2022: BIG FACTORS TO WATCH CLOSELY

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

One complicating factor is that most of the latest major forecasts were published in the weeks before the omicron variant swept the world.

At that time, the mood was that recovery was indeed around the corner, with the IMF projecting 4.9% growth in 2022 and the OECD projecting 4.5%.

These numbers are lower than circa 5% to 6% global growth expected to have been achieved in 2021, but that represents inevitable rebound from reopening after 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 as people stayed away from restaurants.

For the coming months, the combination of raised restrictions, cautious consumers and people taking time off sick is likely to take its toll.

Yet the fact that the new variant seems milder than originally feared is likely to mean that restrictions are lifted more quickly and that the economic effect is more moderate than it might have been.

Israel and Australia, for example, are already loosening restrictions despite high case numbers.

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 brings further damage to both public health and the world economy.

As things stand, the UK thinktank CEBR published a more recent 2022 forecast just before Christmas. It predicted that global growth would reach 4% this year, and that total world economy would hit a new all-time high of US$100 trillion (£74 trillion).

THE INFLATION QUESTION One other big unknown is inflation. In 2021 we saw a sudden and sharp surge in inflation resulting from the restoration of global economic activity and bottlenecks in the global supply chain.

There has been much debate about whether this inflation will prove temporary, and central banks have been coming under pressure to ensure it doesn’t spiral.

So far, the European Central Bank, Federal Reserve and Bank of Japan have all abstained from raising interest rates from their very low levels.

The Bank of England, on the other hand, followed the IMF’s advice and raised rates from 0.1% to 0.25% in December.

POLITICS & GLOBAL TRADE The trade war between the US and China looks likely to continue in 2022.

The “phase 1” deal between the two nations, in which China had agreed to increase its purchases of certain US goods and services by a combined US$200 billion over 2020 and 2021 has missed its target by about 40% (as at the end of November).

The deal has now expired, and the big question for international trade in 2022 is whether there will be a new “phase 2” deal.

Elsewhere, western tensions with Russia over Ukraine and further escalation of economic sanctions against Putin may have economic consequences for the global economy – not least because of Europe’s dependency on Russian gas.

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

Major economies such as the UK, Japan and the eurozone were all still smaller than before the pandemic as recently as the third quarter of 2021, the latest data available.

The only major developed economy that has already recovered its losses and regained its preCOVID size is the US.

On the other hand, China has managed the pandemic well – albeit with strict control measures – and its economy has achieved strong growth since the second quarter of 2020.

As for India, whose economy has seen double dips during the pandemic, it is showing a strong positive trend with 8.5% expected growth in the year ahead.

I therefore suspect that emerging Asia will shoulder global growth in 2022, and the world’s economic centre of gravity will continue to shift eastwards at an accelerated pace.

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