Biggest Economic Risks of 2022

Economists tried hard to predict and prepare for the risks due to the pandemic in 2021. But their predictions didn’t work out. They are again trying hard to predict what 2022 has in store for economies across the world, amid new variants of COVID-19, inflations, hard Brexit, a fresh euro crisis, rising food prices, energy crunches, and peak oil prices. Let us now look at some of these potential risks that can pose global economic threats in the year of 2022.

Omicron and Lockdowns

Though it is early to predict how deadly the new variant of COVID-19, the Omicron can be, though, more contagious than the earlier variants, it may also prove to be less deadly. This can help the world get back to the pre-covid levels of spending, thus increasing the demand and supply of goods. A rebalancing of these spending levels can help and boost global growth upto 5.1%

On the other hand, all of this can be proven to be our wishful thinking. A more contagious and deadly variant can loom on economies across the world, pushing countries into the toughest 2021 restrictions and making economic growth sluggish in 2022.

In such a scenario, demand and supply will fall, workers will be kept out of labor markets leading to worse supply chain and logistic problems. Such scenarios are already evident in the Chinese city of Ningbo which is home to one of the world’s busiest airports, now seeing fresh lockdowns. A new wave of COVID-19 can push the already hit traveling industry into a reel of losses.

Inflation

With post-COVID-19 recovery and supply chain bottlenecks, the widespread surge in power and energy sectors, the costs have been rising, leading to global inflation. The inflation of the US is currently at around 7% contrary to the forecast of 2% by the end of the year 2021. Such major misses in controlling the inflation rates are very much possible with potential causes like Omicron, wage rates which are already rising at a rapid pace in the US. Tensions between Russia and Ukraine can lead to a surge in gas prices.

Similarly, in India though RBI expects the inflation to ease in 2022, the inflation might rebound to 6% in early 2022 due to unexpected higher prices of food, core commodities and services. RBI has been doing a great work in inflation targeting which is evident from the fact that the inflation stayed within the RBI’s target range of 2%-6% for a fifth straight month. But how well inflation in India can be targeted and curtailed in 2022 remains to be seen.

Disruptive weather conditions due to climate change may continue to rise food prices increasing the Wholesale Price Index, worsening the Global Hunger Index of developing countries. India stands at 101st out of 116 countries with a score of 27.5 which depicts a level of hunger that is serious.

Source: Website of globalhungerindex.org

Source: Website of globalhungerindex.org

Uncertain Federal Reserve Policies

Uncertain Federal Reserve Policies concerning managing inflation rates is one of the biggest risks global economies are facing. While the causes are driven by complex factors beyond disrupted supply chains and increased consumer spending, there is no doubt that the solution lies with the Federal Reserve and its Chairman Jerome Powell. The White House might raise taxes to control inflation since other programs to control inflation have not been showing impressive results.

Adding to the risks are already-elevated asset prices. The S&P 500 Index is near bubble territory, and surging home prices suggests that the housing-market risks are bigger than during the sub-prime crisis back in 2007 which might lead to a recession at the start of 2023.[SJ2] 

Federal Reserve policies also influence the RBI. Increase in Fed interest rates narrows the spread between US and Indian government bonds leading to pulling out of money by foreign investors from Indian Government Securities. This might push RBI to increase interest rates in the country to prevent outflow of Foreign Portfolio Investments (FPI) from Indian Bond Market which will weaken the rupee further leading to inflation.

Once the US dollar strengthens further as interest rates of dollar denominated securities might begin to move higher. This will lead to decline in rupee.

Impact of Fed Lift-off on Emerging Markets

To curtail repercussions of COVID-19, USA has been buying bonds and securities in large scale, a process called as Quantitative Easing, which helps in inducing liquidity in its economy. This increased liquidity in the economy helps lower the interest rates, encourages businesses to invest more and consumers to spend more, thereby increasing the aggregate demand. However, this might lead to the central bank running into the risk of higher inflation and hence in September 2021, US Fed Reserve hinted at starting to reduce its large-scale asset purchases, a process known as ‘tapering’ which may lead to higher interest rates in 2022. The tapering process would affect the supply and demand dynamics which can lead to short-term volatility in certain market segments and raise the interest rates. This would mean a global risk aversion as global investors pulls out their money from emerging markets and invest in ‘safe-haven’ assets like gold and US treasury instruments, bringing back the memories of the “taper tantrum” episode of 2013.

Countries like India, the emerging markets, might take the brunt of such taper tantrums due to reduction in funds infused by Fed and increases fed fund rate which will impact the availability and cost of overseas finance of Indian companies. After signals of hike in interest rates in June, the benchmark Sensex fell 461 points or 0.87% The rupee also lost 0.75 paisa or 1% against the dollar during the time.

China’s Great Wall of Debt

In the third quarter of 2021, China’s economy has slowed down due to the weight of the Evergrande (a real estate company that bears $300 billion in liabilities), repeated COVID lockdowns, and energy shortages. This slowed down the economic growth to 0.8% on contrary to the world accustomed economic growth pace of 6%

While the energy crunch caused by high coal costs and inflexibility in electricity prices might show signs of easing in 2022, the ‘Zero-COVID strategy’ of Beijing might call for more lockdowns. According to some government statements, the plan of Chinese government to curtail the Evergrande real estate slump is to manage a controlled implosion by selling off some of Evergrande assets while limiting the damage to homebuyers, businesses and without bringing down the epic property boom of China. But with the dire situation in real estate, the sector which contributes to a quarter of China’s GDP and worth $52 trillion, China’s economy might have to fall further.

On the flip side of the coin, what can go right in 2022?

Amid lockdowns due to new variants of COVID-19, tapering process of US and other developed countries, higher inflation rates and uncertain monetary policies to curtail it, what can go right in 2022?

Globally, households are sitting on trillions of dollars of excess money saved from cutting down on spending during the pandemic during lockdowns. If the world is back to pre-covid times and that money gets spent, boosting the consumer spending, demand, and supply and hence the growth would accelerate.

In China, investments in green energy and affordable housing which is already stated in the country’s 14th Five Year Plan could increase investments. Asia’s Regional Comprehensive Economic Partnership – which includes 2.3 billion people and 30% of global GDP can boost exports in the region.

Countries have been recovering surprisingly rapidly, proving economists wrong in their predictions of sluggish recoveries. This can be true next year, too like in 2021.

Author

Niharika Jayanthi

Editor, TJEF

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