My 2021 Christmas, looking to 2022….

Given the ongoing pandemic and the economic fallout that it has caused, there has likely never been a more challenging time to provide an outlook for the year ahead. Nevertheless, we remain cautiously optimistic that global growth will continue, and that the new variant will not derail economic recovery.

Looking to 2022 right now is a little like driving a car through thick fog at night.

Streetlamps and the curvature of the road offer clues as to what comes next, but to know for certain that there’s a turn ahead, you need to be a lot closer to it than on a clear day.

At the time of writing, the new Omicron variant of coronavirus is spreading rapidly throughout the population. While there is still not enough data to determine its impact on society and the economy, we do know it transmits faster than any variant seen before it, and that three vaccines are more effective against it than two. There is also preliminary data from South Africa to suggest it might be milder than previous variants; however, it’s too soon to know for sure. As a result, we don’t know if the spread of Omicron will prompt further restrictions in early 2022. For those countries with access to vaccines, it is expected a rapid booster programme will alleviate the worst of Omicron’s impact.

As we enter 2022, COVID-19 still has a big influence on the global economy.

One of the consequences of the unprecedented levels of financial and support provided to businesses and households by governments over the past two years has been a rise in inflation. UK inflation jumped to 5.1% in November, its highest level since September 2011, and a figure that had not been expected until April 2022. A mixture of rising energy costs, fuel prices and higher bills in hotels and restaurants have all played a role in increasing inflation, as well as the supply constraints caused by factory closures and staff shortages. The debate on whether higher inflation is a temporary phenomenon, or whether it will start to embed and persist, is still ongoing.

What can we expect?

From this vantage point, it looks like some inflationary pressures will ease over the next year; however, it could take well beyond the next 12 months for inflation to return to the 2% target many major central banks, such as the Bank of England, aim for.

For central banks, the challenge is to prevent economies from overheating, but not to raise rates so much that it might trigger a sharp slowdown or recession. Central banks are poised to tighten policy next year, and interest rates are expected to rise modestly in the UK and the US. The problem is that the timing of these rate rises is complicated by the recent emergence of the Omicron variant. That said, after a series of conflicting signals from policymakers, the Bank of England has already raised rates from 0.1% to 0.25% in a bid to curb inflation. An 8-1 vote in favour of this action shows the Bank of England is not taking recent inflation numbers lightly.

One area to watch with interest as we progress through 2022 is China.

While it was the first country to begin recovering from the pandemic in 2020, the world’s second largest economy has been losing some momentum this year. One reason for this is that it is maturing: the urbanisation rate in China now matches Germany and the population’s age dependency ratio is now likely over 50% i.e. more non-working and children than working age population. It’s now a more established market, and we expect to see GDP growth of around 4.5% per annum, rather than the 6%-7% we’ve been used to in recent years. In 2022 it will be interesting to see the ongoing impact that the ‘common prosperity’ programme will have on economic growth and investment opportunities. Chinese equities remain cheap in our view and we’re still positive on the outlook – albeit more cautious than we once were. We’ll continue to keep a close eye on what’s going on in the East as the year goes on.

Looking to the wider world, global economic growth will moderate in 2022 but is expected to remain above the average of previous years, which can in part be credited to massive, albeit reducing, stimulus packages seen across the developed world. We think it unlikely the world will return to the extensive lockdown restrictions seen previously although targeted measures will likely mean ongoing supply chain disruptions. People are adaptable, and as individuals and businesses have learned to adjust to pandemic conditions, the economic impact of each subsequent lockdown is less severe.

One can never be certain what lies ahead but we remain cautiously optimistic about the prospects for 2022.