Beware of the known; and unknown
As the economic consequences of the pandemic continues to dissipate and the global recovery progresses further, economic policymakers are now faced with the herculean task of taming inflation amid the fragile global recovery. With the risk of a rates lift off looming larger in 2022, a number of themes are expected to dominate the macroeconomy. Many of the themes are carried forward from last year, but are likely to be more conspicuous in 2022.
Inflation and normalization: The US is facing the highest inflation since 1982, and there is evidence that it is likely to persist. Unfortunately, the Fed has been slow in responding to the inflationary pressure, and the biggest near-term risk is that the Fed is seriously behind the curve and has to get serious. For a Fed that has been largely tolerant over the past 22 months, providing support to the economy to heal it from the coronavirus pandemic, the upsurge in US inflation to a record-high has tilted monetary policy odds away from pandemic support. The first rate hike is expected in March, while the Fed is also simultaneously
embarking on quantitative tightening. Only time will tell how the interaction of these two policy tools will play out, and the eventual impact it will have on inflation. There are indications that the anticipated three interest rate hikes and a smaller Fed balance sheet may not be sufficient to rein inflation to the
2% target.
Fiscal tightening: While monetary policy tightening is likely to have a bigger impact on financial market dynamics, fiscal tightening could have a bigger impact on the economy as policymakers dial down their pump priming measures. Public spending to provide support to households and small businesses has been the catalyst for recovery from the COVID-19 slump,and now governments are tempering the fiscal stimulus. The austerity points to slower economic growth, although it could also help rein in the inflationary pressures heating up some economies. The pace of fiscal consolidation varies across countries, and for a variety of reasons. However, budget plans for this year are not set in stone, and governments can adjust them if the virus persists.
Technology and E-commerce: There is no doubt that these sectors have been some of the biggest beneficiaries of the pandemic, as the transition from traditional, in-person retail sales to online sales accelerated through the pandemic. This is not likely to change in 2022 especially in emerging markets where they have significant scope to penetrate. As the world continues to manage the COVID-19 pandemic, the world will likely continue to interact more remotely than ever before. Technology will continue to assist with this global transformation. It has also become abundantly clear that e-commerce is not just a fad or a seasonal story but rather represents an ongoing growth narrative with many associated economic knock-on effects for payment providers, industrial real estate, air freight and logistics firms.
Supply constraints: From supply chainbottlenecks to labour supply constraints, bothare trends than began with the pandemic andare likely to persist longer than expected. Whilesupply chain bottlenecks are expected to easefurther, they are unlikely to be eliminated,fuelling inflationary pressure. The pressure onprices will also be felt in the labour market asemployees demand for wage increases to makeup for price increases, or outrightly resign tohigher paying jobs. The pandemic collapsed thebarriers associated with the geographicalmobility of labour, hence competition for talentis now global. Therefore, apart from monetarycompensation, workers will also look out forother benefits including flexibility of workinghours and/or location.
Multiple covid waves and mutants: As the pandemic gradually transitions to an endemic, and vaccine equity remains but a long call, multiple variants of the virus will emerge amid less severe social constraints. The Sub-Saharan Africa (SSA) will remain highly vulnerable to multiple waves of the virus because of its limited access to vaccines. However, policymakers will be cautious not to hurt economic recovery by implementing stringent lockdowns. Service activities will still be constrained and this will culminate in a divergently growing, but sluggish economy.
Geopolitics and Political risk: With elections at various levels scheduled in no less than 30 countries and territories – especially in emerging markets -, 2022 could be a political pottage. Political risk looms large – from extreme candidates coming out victorious and adopting hostile policies, to election-related violence, to increased domestic and international tensions. French elections (April and June) may be the center of focus in the global economy as it influences the power dynamics of the EU, to some degree. Let us not forget the US mid-term elections (November). Important elections will also be taking place in a host of other countries including Kenya (August), Brazil (October), Philippines (May), Colombia (March and May), and South Korea (March).