Our best wishes to all members for a prosperous and productive Year of the Tiger!
After a strong global economic recovery last year, it is likely growth will continue although with some moderation in 2022. According to the Economic Outlook from the World Bank published in January, global GDP growth is expected to ease to 4.1% this year from 5.5% in 2021.
This column will look at a few of the key issues that are likely to influence the outlook for global markets in the Tiger year ahead.
Covid pandemic
As the world enters into the third year of the pandemic there is gradual – albeit grudging – acceptance of the “new normal” that takes into consideration the presence of Covid. (At the time of writing, the highly transmissible Omicron variant had begun to spread in Hong Kong, forcing the government to tighten social distancing rules for the first time in almost a year.)
Before the emergence of the latest variant, the Chamber had forecast Hong Kong’s economy to grow by 2.8% in 2022. It is premature to predict whether Omicron will significantly hurt the city’s economic outlook, but it is certainly a major cause of concern.
On a positive note, initial findings suggest that the effects of Omicron are less virulent than previous variants. Meanwhile, businesses are using technology adoption and operational adaptation to adjust to an environment characterised by the fits and starts of lockdowns.
However, not all business models lend themselves to remote operations. This is the case in service sectors such as food and beverage, which are likely to be especially affected if stringent social-distancing rules should continue into Chinese New Year, when consumption is at its highest.
Needless to say, SMEs are especially vulnerable to another wave of the pandemic, mainly because of the lack of access to financing and the fact that many have already depleted a significant portion of their reserves in order to survive.
Inflation
A running joke in the economics profession goes like this: If you put 10 economists in a room, you’ll get 11 opinions. Even though Federal Reserve Chair Jerome Powell has already ditched the term “transitory” for describing the higher price levels observed in the United States during the past year, the debate on whether the current inflation is transitory continues.
This is an important issue because the viability of the massive borrowing and spending programmes by governments around the world is dependent almost entirely on the thesis of a drawn-out period of low interest rates and low inflation.
While inflationary pressure may have already peaked, or may ease soon, it is likely to stay above pre-pandemic levels for a while longer. As the bite of lingering inflation begins to sink in, companies that had initially absorbed additional costs – from energy, transportation and raw materials – out of fear of losing price-sensitive consumers, will eventually pass on these price rises if there is no abatement soon.
Another reason for a likely prolonged period of inflation is the phenomenon of supply chain disruption. More importantly, the coronavirus will continue to manifest itself in new strains through further mutations unless existing inequities in access to vaccines are addressed quickly and effectively. The pursuit of a zero-Covid strategy in Mainland China and Hong Kong means factories and ports could be closed for weeks, should there be any new outbreaks.
Policy normalisation
Since the onset of the pandemic, major economies have flooded their markets with unprecedented amounts of money through a combination of easy fiscal and monetary policies. While these extraordinary measures were deemed necessary to counter the effects of Covid, they have contributed to high inflation in major economies and had the effect of pushing up prices across virtually all asset classes, further widening the gulf between the haves and the have-nots.
Furthermore, massive liquidity injections into the financial market are no longer a priority after two years of the pandemic, as cheap money can hardly be the right medicine for more pressing economic issues such as supply chain disruption and inflation.
In the U.S., the Fed’s bond-buying programme, known as “quantitative easing” or QE, is being wound down and will come to a halt by the end of the first quarter of 2022. At the same time, three interest rate hikes in 2022 are expected according to the so-called “dot plot” graphic of rate projections published in December.
There are always questions on whether the Fed will follow through on its plans, but a return to a neutral monetary policy appears inevitable and is unlikely to be derailed by the emergence of Omicron and other new strains of Covid-19.
It is perhaps noteworthy that a number of central banks have already embarked on the tightening cycle by raising interest rates. This comes at a time when fiscal policies in many economies have become less expansive compared to a year earlier, notwithstanding recent developments with Omicron, which has cast a pall over economic prospects.
Global debt
If global debt levels were already a cause of consternation before the pandemic, the latest figures will likely be a source of anguish and despair for those who care about these matters.
According to data from the International Monetary Fund, global debt rose by 28 percentage points in 2020 to 256% of GDP, representing the largest increase in one single year since World War II. A more hawkish stance by the Federal Reserve would therefore be bad news for governments, corporations and households that have accumulated a large amount of dollar-denominated debt since the pandemic.
The good news – depending on your perspective – is that borrowing by governments accounted for slightly more than half of the increase, suggesting that central banks around the world may be precluded from tightening too fast, too aggressively.
Keeping inflation stable remains a key mandate for central banks but the pandemic has blurred the lines between monetary and fiscal policy considerably, with such economic costs being transferred from governments’ balance sheets to that of central banks.
Wilson Chong, [email protected]