In early December, the Organisation for Economic Co-operation and Development (OECD) published its latest appraisal of world economic prospects. In a relatively positive assessment, the Paris-based soothsayer predicted that global growth would hit 5.6% in 2021 before moderating to 4.5% in 2022. However, the OECD did warn of potential risks suggesting ‘the global recovery is strong but imbalanced.’
A key area of concern relates to the Omicron variant, which OECD Chief Economist Laurence Boone said could pose “a threat to the recovery, delaying a return to normality or something even worse.” However, while the forecasting agency did warn that the new variant threatens to intensify the imbalances that are slowing growth and raising inflationary pressures, it also advised monetary policymakers to be ‘cautious,’ stating that the most pressing policy requirement was currently to accelerate the vaccine roll-out programme globally.
The new variant and subsequent restrictions have raised fears about economic recovery and growth around the world, while rising inflation and global supply chain issues have generated a policy dilemma for central banks.
The OECD expect economic growth in the euro area to be 5.2% in 2021 before slowing to 4.3% in 2022. In Q3 2021, growth was supported by private consumption, which was fuelled by pent-up demand. The very rapid resumption in economic activity has now moderated due to manufacturing and transportation supply chain bottlenecks, combined with a rise in energy prices, which have triggered an inflationary surge. Although inflation dynamics diverge widely across the euro area, they are expected to be transitory. Eurozone inflation reached a 13-year high of 4.1% in October. Despite price and supply pressures, the European Central Bank (ECB) chose to maintain its interest rate and monetary policy approach, with Christine Lagarde, ECB President, believing that analysis doesn’t support an interest rate increase before the end of 2022.
According to Focus Economics, the Swiss economy maintained ‘healthy growth momentum’ in Q3, with manufacturing and services PMIs in positive territory. However, initial signs suggest the economy will lose momentum in Q4 2021, as manufacturing and services PMI move lower due to supply constraints and higher prices. Economic growth is expected to ease in 2022, but momentum should remain healthy, supported by a strong labour market which is driving private consumption. Trade links with the EU are expected to slowly deteriorate in the absence of a remodelled trade deal. The economy is predicted to grow by 3% in 2022.
In terms of the UK economy, the OECD increased its 2021 growth forecast to 6.9%, 0.2 percentage points higher than previously expected. This upgrade propelled the UK to the top of this year’s G7 growth rankings, although looking further ahead the OECD did warn that ‘a prolonged period of acute supply and labour shortages could slow down the recovery.’
Similar themes also featured in recently released updated forecasts from the Confederation of British Industry (CBI) and accounting firm KPMG. The CBI said it now expects growth of 6.9% this year and 5.1% in 2022, downgrades from previous predictions of 8.2% and 6.1%, which largely reflect weaker-than-anticipated data released since its June forecast. KPMG issued a more pessimistic prediction; its ‘best-case’ scenario forecasts a growth rate of 4.2% next year, with any additional disruption due to the Omicron strain expected to dampen the recovery further.
The economic impact of the new virus strain also inevitably featured in Bank of England (BoE) policymakers’ deliberations. On 16 December, after much speculation, the Monetary Policy Committee (MPC) voted 8-1 to raise Bank Rate for the first time since 2017. The increase from 0.1% to 0.25% was modest and still left the rate below the pre-pandemic level. The BoE said it had to act now, even as the Omicron variant sweeps Britain, because it saw warning signs in underlying inflation pressures. The world’s first major central bank to raise interest rates since the pandemic, the BoE warned inflation was likely to hit 6% in April – three times its target level. With inflation currently standing at 5.1%, the highest in a decade, BoE Governor Andrew Bailey said it needed to tackle strong inflationary pressures building up in the economy.
The OECD project US GDP to grow by 5.6% in 2021, before rising by 3.7% in 2022. Supply disruptions are expected to ease gradually, enabling robust consumption growth, which will underpin household consumption and business investment moving forward. Inflation has been higher and lasted longer than policymakers had anticipated. Consumer prices climbed 6.8% in November, the quickest pace of increase since 1982.
In mid-December, the Federal Reserve announced it would end bond purchases in March and pave the way for three quarter-percentage-point interest rate hikes by the end of 2022, as the economy nears full employment and the central bank copes with a surge of inflation. Fed Chair Jerome Powell commented, “The economy no longer needs increasing amounts of policy support… Economic activity is on track to expand at a robust pace this year (2021), reflecting progress on vaccinations and the reopening of the economy.” He continued, “In my view, we are making rapid progress toward maximum employment,” and said that demand remained “very strong”, although the arrival of the new variant posed a risk to the recovery.
US equity markets recently hit record highs, initially prompted by a positive start to the US earnings reporting season. However, the ongoing risk of the Omicron variant and the news from the Federal Reserve about interest rate hikes next year, are beginning to weigh.
Asia and Emerging Market Equities
Chinese economic growth is expected to reach 8.1% in 2021, before slowing to 5.1% in 2022. The recovery, driven by strong exports and strong investment, stalled in H2 2021. Tensions between the US and China, stagflation concerns and China’s downgraded economic growth all impacted market performance. The Japanese economy is projected to grow by 1.8% in 2021 and 3.4% in 2022 according to the OECD. With the recovery still to gain traction, policy support remains important, especially for the most affected businesses and households.
IMF economic growth projections for emerging market and developing economies are 6.4% growth in 2021 and 5.1% in 2022. These forecasts are marked up slightly compared to the July 2021 IMF update, reflecting upgrades across most regions. Although these projections were made prior to the emergence of the new variant.
Concerns that Omicron could slow global economic growth have sent oil prices lower. The Organisation of the Petroleum Exporting Countries and its allies (OPEC+) postponed technical meetings to early December, giving themselves more time to assess the impact of the variant on oil demand and prices. Brent Crude is currently trading at around $72 per barrel. Regarded as a safe haven asset, the price of gold is currently supported by the emergence of the new variant as investors favour the precious metal. Gold is currently trading at around $1,807 a troy ounce.
While the coming year is sure to present ongoing challenges for investors, there are indications that 2022 will present opportunities as well as risk, as we venture towards post-pandemic life. The key to successful investing will remain the adoption of a carefully considered strategy based on sound financial planning principles. With our help and careful repositioning of your portfolio, to take advantage of growth opportunities, you should be able to make the most of these as and when they arise. Please do not hesitate to get in contact with any questions or concerns you may have.