Moving from stagflation to growth

7 January 2022

The world economy in 2022

Our economic road map for 2022 suggests that the first six months of the year could be problematic, particularly when compared with 2021: Price pressures look as though they might ease, but inflation could remain uncomfortably high for the first few months of the year. This is a continuation of the stagflationary narrative that persisted in the second half of last year, and the emergence of the Omicron variant could tip us further in that direction.

Prospects for the second half of 2022 look better, as inventory rebuilds, and the unwinding of supply chain disruptions could fuel a more sustainable recovery. An improved growth picture and slower inflation should bring us back to a Goldilocks regime, which should be far better for market returns and general risk assets.

Navigating known unknowns

It isn’t particularly fashionable or click-worthy to admit that we have less confidence in our base-case projection than normal, but we believe it’s important to acknowledge the highly uncertain environment that we’re in as we head into a year dominated by a very long list of known unknowns.

Global policy responses to COVID-19—COVID-19 can affect the global economy in two key ways: changes in household/business behaviors and government responses in the form of restrictions on economic activity, social mobility, or trade. Problematically, there isn’t really any robust way to forecast these responses.
A Global supply chain disruptions—In our base case, we’ve already endured the worst of the disruptions in global supply chains. If we’re correct, companies should be able to restore depleted inventories, thereby contributing to growth through inventory rebuilds and extended capital expenditures. That said, our ability to model how quickly supply chain bottlenecks will dissipate and whether a new COVID-19 variant will lead to further disruptions is limited.
The return of U.S. labor force participation—Fear of contracting COVID-19, direct government assistance, and early retirement are among key reasons why U.S. workers opted to stay out of the job market last year. However, the U.S. labor force participation rate barely budged in the second half of 2021, even after several of these factors subsided. We're in uncharted territory here, meaning there isn’t a robust forecasting model that we can turn to for a sense of how the labor force will behave in 2022.
Policy responses to higher prices and lower growth—We expect global central banks to pursue a tightening bias in the first few months of the year, when price pressures will remain high in all likelihood, before making a dovish pivot as upcoming economic data paints a weaker picture of the economic environment. However, forecasting central bank policy is always a mix of art and science but, more often than not, the uncertainty usually has to do with the timing of a policy decision as opposed to its direction of travel. That’s less the case in 2022.

To learn more about the macroeconomic themes for North America, Europe, Asia-Pacific and Latin America, download the full edition.

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