We have started 2022, and the year yet to come (well six days are already over) will need to tackle the issues left over from 2021, namely the coronavirus, the onset of inflation with a likely increase (or is it increases?) in interest rates, supply chain issues, tensions among the world’s leading governments, climate change and the impact of our country’s greylisting.
All these elements are leading to uncertainty which will need to be addressed.
The year will also bring its own interesting developments, which may pile up even more uncertainty on top of what there is already. One of the questions that is often asked is what growth rate we can expect for the global economy. The forecast for the global economic growth rate is around five per cent for 2021, while the expected growth rate for 2022 is at around four per cent. The slower growth rate is due to increased inflation and higher energy prices that will put a squeeze on consumer spending.
Up to a few weeks ago, many analysts thought that the inflationary pressures were transitory and would fizzle out over a period of a few months. There is now agreement that inflation will persist in the medium term and this will require them to start normalising interest rates. The time of interest rates close to zero per cent and cheap money is now gone. Quantitative easing will be ended and there will be a much tighter monetary policy run by central banks.
An increase in interest rates (and therefore the cost of borrowing for governments, businesses and individuals) will dampen bond prices and property prices. What will happen to equity prices is still a question mark. Will investors exit bonds and move into equities? To what extent will financial markets follow the fortunes of the real economy?
The year will bring its own interesting developments, which may pile up even more uncertainty on top of what there is already
The significant increase in public and corporate debt since the start of the pandemic coupled with higher interest rates may prove to be too much of a shock which the economy may not be able to sustain. This could cause a reversal of policy, leading to even higher inflation. Therefore, 2022 may prove to be a catch-22 situation for central banks. They will be damned if they do not raise interest rates and they will be damned if they do.
Another challenge that will be posed to us during 2022 will be the climate. There is the expectation that we will get more heatwaves, fires, droughts, hurricanes, floods, typhoons and other disasters. This will push up food prices even further, thereby continuing to fuel inflation.
There may also be an increase in migration towards Europe and the US due to climate change. If this were not enough, until there is enough energy produced from renewable sources, energy generated by fossil fuels will increase in price.
The geo-political environment is nothing to be happy about, with China and the US at loggerheads on practically everything and with Russia keen to show it has built its muscles once again after the collapse of the Soviet Union.
Europe could go through an interesting phase in the first six months of this year with France taking over the presidency, and as a result, Emmanuel Macron seeking to assert himself as the leader of the EU, now that Angela Merkel is gone, and the new German chancellor still finding his feet trying to lead a three-party coalition. In his speech on assuming the presidency, Macron declared that “the year 2022 must be a turning point for Europe”.
European leaders are set to meet in Paris in March. This could be an opportunity for them to agree on a major reform of the EU’s budget rules and allowing member states to have a more loose fiscal policy. It is unknown how Germany’s coalition government will react to this proposal but Macron has already obtained the support of Italian Prime Minister Mario Draghi.
Given this scenario, there are many who believe that 2022 may prove to be a more difficult year than 2021 was. One would most certainly hope not, but this is why governments, including the Maltese government, need to adopt a stance where prudence and sobriety are the order of the day.