The global economy began to rebound strongly in 2021 from its lows in the pandemic, but the pace slowed in the second half, in part due to renewed Covid-19 outbreaks, bottlenecks in supply chains, lack of labor and a slow campaign of vaccination against the coronavirus, especially in low-income and developing countries. The slower recovery has caused economists at the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) to reduce their growth forecasts for this year in October and December, respectively.
Both institutions, however, maintained their forecasts for 2022, although they warned that variants of the coronavirus could hamper growth and highlighted the need to rapidly vaccinate the vast majority of the global population. The pandemic therefore remains a major risk to global growth, but it is not the only threat likely to keep investors on their toes in the coming year.
Vaccine-resistant variants of coronavirus
In November, financial markets took a fright: a new variant of the coronavirus, omicron, was reported in southern Africa. The highly transmissible strain has brought down financial and commodity markets. Over the next week, global markets continued to fluctuate as traders tried to assess the economic implications of the new variant. Governments have been tightening restrictions to contain the strain’s advance, which threatens economic recovery. Early evidence and experts suggest that although it is more transmissible than the delta variant, omicron is not as severe as its predecessor and that the new strain does not escape the immunity produced by current vaccines. As scientists analyze the data, strategists at JP Morgan assert that if the omicron is indeed “less deadly”, then it could end up hastening the end of the pandemic.
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It is possible that omicron is therefore not able to get the economic recovery off the rails, but a future variant could be. Experts have warned that if the pandemic is not brought under control, vaccine-resistant strains could emerge, which could mean the return of lockdowns. “If covid-19 has a prolonged impact – in the medium term – it could reduce global GDP by 5.3 trillion dollars (BRL 30 trillion) over the next five years from our current projection,” said the chief economist from the IMF, Gita Gopinath, in October. Gopinath said the top policy priority should be to ensure that 40% of the population in each country is fully vaccinated by the end of this year and 70% by mid-2022. To date, less than 5% of the population in low-income countries is already was fully vaccinated.
Bottlenecks in supply chains
Disruptions in supply chains played a key role in slowing the global recovery this year. Problems in shipping, including container shortages, and a sharp recovery in demand when pandemic-related restrictions were eased left producers scrambling over components and raw materials. The automotive sector has been one of the most affected by the drop in production in the euro zone, including Germany, in recent months. Automakers have cut production because of a shortage of materials, especially semiconductors.
While there are signs that the shortage in supply chains is easing, experts expect bottlenecks to continue to affect growth in the coming year. “We hope the situation doesn’t ease in 2022 – and until relevant new shipping capabilities are rolled out in 2023 or supply chains are adapted to nearshoring,” said Frank Sobotka, managing director of transportation and logistics company DSV Air & Sea Germany, to DW.
Lack of raw materials and inputs, together with higher energy prices, have pushed inflation in the eurozone and the US to the highest level in years. This has frightened investors around the world, who fear central banks will be forced to prematurely raise interest rates to tame rising prices. The European Central Bank has said that prices have been pushed up by temporary factors such as supply shortages and higher energy prices. The institution expects inflation to decline as the effects of imbalances between global supply and demand diminish.
With supply chain disruptions proving more persistent than previously thought, inflation is expected to remain high through most of 2022, putting pressure on the European Central Bank. In the US, inflation concerns are expected to be even greater, driven by a rapid economic recovery, massive fiscal stimulus, and labor and supply shortages. The Federal Reserve has signaled interest rate hikes in 2022. A rise could spell trouble for some emerging economies, including South Africa, Argentina and Turkey, which could see capital flight.
A slowdown in China, the world’s second-largest economy, would certainly heighten investor concerns in 2022. The Asian economic powerhouse helped the world recover from the pandemic-induced recession in 2020, boosting global demand for its electronics and medical products. It was the only major economy to grow in 2020 and is expected to grow by 8% this year, making it the fastest growing major economy after India. However, the post-pandemic recovery is being held back by Beijing’s offensive against its own tech giants, including Alibaba and Tencent; heavily indebted real estate companies such as Evergrande and Kaisa; and the private education industry. Top Chinese officials have sought to calm tempers, saying stabilizing the economy would be their top priority for next year, raising expectations of a fiscal stimulus in early 2022. isolated for over a year and led to draconian restrictions after a single case of covid-19, it also remains a major risk to the global economy.
Even with temperatures dropping in the Northern Hemisphere, the climate has warmed with regard to relations between Russia and the US and its European allies. Washington warned Moscow against an invasion of Ukraine amid a swarm of Russian soldiers stationed on the Ukrainian border. The United States and its allies in Europe are considering imposing further economic sanctions against Russia, including blocking the controversial Nord Stream 2 pipeline if Moscow orders an invasion of Ukraine. “US-Russian tensions are a huge risk, which could increasingly leave NATO allies in the east on the brink of war,” Edward Moya, senior market analyst at trade group OANDA, told DW. “If the US and Europe lock up the Nord Stream 2 pipeline, it could lead to a global energy crisis that would push oil costs to $100 a barrel. central bankers globally to accelerate the tightening of monetary policies.”
Furthermore, US-China relations have been tense over Taiwan, with Washington warning Beijing against unilaterally changing the status quo over the island’s territory. Washington has further angered Beijing with its announcement that US officials will boycott the Beijing Winter Olympics in February over human rights “atrocities” in China. China said the US would “pay a price” for its decision. Author: Ashutosh Pandey
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