It is necessary to foresee many factors and unknowns to make realistic business plans for the following year.
Still, in 2022, three main developments will mark the global economy: Pandemic, Inflation, and Interest.
Pandemic – Induced Contraction is Not Expected
As in the last two years, the central question of 2022 is how the pandemic will progress. Many companies and investors have begun to buy into the idea that the SARS–CoV–2 virus will turn from a pandemic into an endemic by 2022. But its impact will be felt until it turns into an endemic, where the virus circulates in a more limited environment, especially in the first half of the year. In addition to vaccination, the licensing of new drugs and the “belief” that Omicron is milder than previous variants changed the outlook on the pandemic, creating optimism about the year. Although the predictions made last year were also based on the projections that the pandemic would end in 2021, the predictions did not hold. In short, a pandemic–induced contraction in economies is not expected in 2022.
Central Banks Raise Interest Rates
There may not be a “pandemic–induced” contraction, but this should not be interpreted as a growth in the global economy. There is also the uncertainty of an interest rate hike, which is as contagious and corrosive as the Covid–19 virus. The Fed has started to gradually reduce the money it gives to the markets this year. In 2022, it is expected to add another move, namely an interest rate hike, to this move. Forecasts are for the Fed to make at least two increases next year. Past Fed rate hikes also show that; Whenever the Fed raises interest rates, the global economy feels its distress through different channels. This problem may be felt more acutely in emerging market (EM) economies where many external financing needs are high.
2022 will be a year when the Fed and many central banks will increase interest rates. Global interest rate hikes mean tightening financial conditions and higher borrowing costs. In an environment where we cut interest rates, the interest rate hikes of other emerging market economies mean that the interest gap between them and us is closed. On the other hand, the interest rate hikes of these countries, from which we are trying to attract funds from the same pool, may give them an advantage in the fund race.
Inflation can Slow
The main story behind the global rate hikes was the substantial rise in global inflation in 2021. This year, inflation increased beyond expectations in many economies, confusing the calculations. Especially in the USA, historical peaks were seen. Next year may not be as bad as this year. This year, some of the factors that got inflation “out of control” may go out of business in 2022. Some factors that caused disruption this year, especially in supply chains, may lose their severity in 2022. Commodity price increases may lose momentum. With the effect of interest rate hikes, 2022 will see the inflation peaks in some developed and developing economies; Then, there may be a year when it noticeably softens. Behind high inflation are global factors and conditions specific to the country’s economy and some critical policy choices. However, the softening of global inflation will at least alleviate the pressure coming through the import inflation channel.
Although concerns about the delta variant have not completely disappeared yet, the emerging Omicron appears to be the new dominant species in the global epidemic. While variants encourage policymakers to continue with supportive policies, there is the risk of persistent inflation in return. The USA inflation, which was expected to hover around 2 percent annually in 2021 before the epidemic, rose to 6.8 percent, the highest level of the last 40 years. As climate change brings more devastating weather events, food prices could grow.