Welcome to Kitco News’ 2022 outlook series. The new year will be filled with uncertainty as the Federal Reserve looks to pivot and tighten its monetary policies. At the same time, the inflation threat continues to grow, which means real rates will remain in low to negative territory. Stay tuned to Kitco News to learn from the experts on how to navigate turbulent financial markets in 2022.
(Kitco News) -Economists and market analysts are describing 2022 as an inflection year as the global economy continues to recover from the ongoing COVID-19 pandemic.
While down from the historic rise in 2021, global economic growth is still expected to be well above trend and support central banks as they look to tighten their ultra-accommodative monetary policies.
The shift in monetary policy is expected to reduce some liquidity in the marketplace. Still, economists don’t expect that it will have a significant impact on economic activity. Most economists expect global economic activity to rise by at least 4% next year, driven by solid consumption as consumers start to deploy cash hoarded during the worst pandemic.
Douglas Porter, chief economist and managing director of economics at BMO Financial Group, said that he expects the global economy to grow 4.5% in 2023 and 4.0% by 2023.
“To put those figures into some perspective, a typical year for the world economy in recent times would see growth just a bit above 3%,” he said in his recent 2022 outlook report.
Kristina Hooper, chief investment officer at Invesco, said she is looking for solid activity early in 2022 and falling lower through the rest of the year.
“We are transitioning to normal. We might not get to normal by the end of 2022, but we will be making progress towards normal,” she said.
Economists at Bank of America described 2022 as the start of a balancing act. They are not expecting the global economy to find an equilibrium but will make progress. The bank expects to see 4% growth in the U.S. next year, with most of the activity coming during the first half of the year.
“We are not out of a pandemic economy and future COVID waves are the biggest downside risk,” said Michelle Meyer, chief U.S. economist at BofA.
Fed to raise interest rates but won’t rock the boat
Most economists expect that the global economy will have enough momentum to withstand rising interest rates after riding the wave of unprecedented monetary and fiscal stimulus in 2021.
Earlier this month, the Federal Reserve signaled that it sees the possibility of three rate hikes next year. According to the CME FedWatch Tool, markets expect the first rate hike to come as early as May.
Some economists said that U.S. monetary policy could pose the most considerable risk to economic growth in the new year, which is why it is anticipated that the U.S. central bank will be extremely methodical in its measures.
“The Federal Reserve doesn’t need to be aggressive,” said Darrell Cronk, chief investment officer of Wells Fargo Wealth & Investment Management. “The Federal Reserve is not going to drive the economy over the edge by overtightening.”
Currently, Wells Fargo sees the global economy growing 4.5%, with the U.S. economy in lockstep with 4.5% growth as well.
Bank of American is one of the most aggressive on U.S. monetary policy as it expects to see three rate hikes next year.
However, Meyer said that they expect consumer price pressures to remain elevated next year and the U.S. central bank is not going to try and get in front of the inflation curve.
In fact, most economists don’t expect the Fed to use interest rates to tamp down inflation next year, which some expect could run as high as 6%.
Plenty of uncertainty to impact growth
Cronk noted that even if the Federal Reserve looks to start raising interest rates in the first half of the year, there is still a lot of time between now and May or June.
One of the most significant risks still impacting the global economy is the ongoing COVID-19 pandemic. European nations are looking at initiating new lockdown measures to stop the spread of the Omicron variant, which is now spreading rapidly worldwide.
So far, the U.S. has resisted implementing new measures as it asks people to get vaccinated.
Economists say that the global economy should be able to survive a short lockdown. Still, prolonged measures could force central banks and the government to pour more money into financial markets.
Inflation remains a major risk for growth in 2022
One of the main reasons economists remain optimistic that the global economy will see above-trend growth next year is because of well-positioned consumers.
Economists note that consumers have been sitting on pandemic money provided by the government and that cash is expected to be unleashed through 2022. However, the biggest hurdle for consumers is inflation and falling purchasing power.
While consumers could withstand inflation around 4%, some economists have said that anything much higher would start to weigh on consumption growth. Economists also note that higher inflation could force the Federal Reserve to tighten more aggressively.
“A big risk is if inflation expectations become unhinged on the upside and force the Fed to hike even faster and more aggressively, short-circuiting the business cycle,” said Meyers.
A U.S. without monetary or fiscal stimulus
Finally, a risk that has just appeared on the horizon is that the U.S. economy could face new hurdles as the Federal Reserve tightens its monetary policy while the U.S. government struggles to pass new spending legislation.
At the start of the month, President Joe Biden’s aggressive Build Back Better legislation was dealt a major blow after West Virginia Senator Joe Manchin said that he could not support the proposed bill.
The disappointing news regarding Biden’s key piece of legislation caused some economists to lower their 2022 forecasts. Goldman’s chief economist Jan Hatzius led the way. He said that the investment firm now expects the U.S. economy to grow 2% in the first quarter of 2022, down from its initial forecast of 3%.
Goldman sees U.S. GDP expanding 3% in the second quarter, down from the previous estimate of 3.5%. The bank sees economic growth of 2.75% for the third quarter, down from 3%.
Stagflation is a low risk
Some market analysts have warned that rising inflation could lead to stagflation; however, most economists see this as a low risk in 2022.
“We have high inflation, but we also have a healthy labor market. Those aren’t the right conditions for stagflation,” said market analysts at Bank of America.