Outlook 2022: Macro

Tiptoeing back toward normalcy

Undulating coronavirus waves made 2021 an extremely challenging, practically unforecastable year for macroeconomists. At least a few things in the macro world should return to normal next year.

Whoever had been hoping for a rapid return to business as usual in year 1 A.C. (after COVID) was grievously disappointed in 2021. COVID-19’s macroeconomic side effects and risks kept many things in an abnormal state marked by chronic clogging of global supply chains, much higher-than-expected inflation, recurring contagion waves (the impacts of which were often underestimated), and quite a bit more. In this environment, even near-term macro forecasts were subject to a high degree of uncertainty, even more so than usual. And given the rollercoaster trajectory of economic activity over the last two years, the longer-term effects of the pandemic on labor markets and inflation are also still indeterminate and hazy at the moment.

At least part of the macro data fog should lift over the course of 2022. Even though all projections remain fraught with a high degree of uncertainty and forecasts to two decimal places are futile, we think the macroeconomy looks set to return to normal to a certain extent next year.

Continued robust growth…
…amid a little less inflation

Macro forecasts

For example, we expect to see a return to more normalcy in inflation, a subject that has been talked about to death this year. After peaking at the turn of the year, inflation should pull back significantly over the course of 2022 as a result of base effects and an easing of the current tight supply and demand balance for goods. Afterwards, a new “inflation normal” around 0.5 percentage points above the pre-pandemic level could take hold as a result of various causes (including demographics and the costs of the green transformation). Monetary policy also looks set to return more to normal. The US Federal Reserve will end its securities purchases by mid-2022 and may even move to start raising interest rates in the second half of the year while the European Central Bank is at least likely to scale back its quantitative easing measures. Nevertheless, the monetary policy environment will remain accommodative for the time being, which means that the global economic expansion in our baseline scenario won’t get choked off by rapidly rising interest rates. Quite the contrary in fact, GDP growth in 2022 in the USA and Europe looks set to stay well above average, though it won’t be as high as it was in 2021. Government economic stimulus and financial aid programs will continue to exert boosting effects on growth (albeit with waning force). Moreover, consumers in industrialized nations are sitting on a big savings stockpile and there is still a lot of pent-up demand that is likely to be released next year not just for goods, but also increasingly in the service sector. Last but not least, the likelihood that current bottlenecks in world trade will slowly resolve themselves also improves the prospects for the manufacturing sector. However, the coronavirus remains a risk factor. Recent news about the discovery of a new and even more dangerous variant in Africa vividly reconfirmed this.

Upwards from now on
End of ultra-low interest rate regime in sight

Kaiser Partner Privatbank interest rates view

Sources: Bloomberg, Kaiser Partner Privatbank

(Geo)political developments are unlikely to significantly alter the 2022 macroeconomic picture outlined above, but should nonetheless be watched closely. In the USA, President Joe Biden might be able to ram one more major item on his Build Back Better agenda through Congress before the spotlight turns to the mid-term elections, which currently hold out fairly bleak prospects for the Democrats. In Europe, meanwhile, attention could soon turn to the presidential election in France in April. An unexpected victory by the right there could at least temporarily generate headlines and volatility on the markets. China, however, is likely to be the biggest element of political uncertainty again next year. China’s economic and military rivalry with the West in general and with the USA in particular looks destined to continue, and the longer it does, the more mounting risks it harbors. China, meanwhile, is again unlikely to be a driver of world growth in 2022. The country’s government appears intent on focusing on securing (economic) stability ahead of the 20th party congress in autumn, so enactments of support measures can thus be expected (or have already taken place) particularly concerning China’s real estate market. However, this year it became abundantly clear that the leadership in Beijing has definitively shelved China’s old economic model and is prioritizing the new slogan “common prosperity for all” even at the expense of growth objectives.