Despite covid and its many variants, 2021 will have been a good year for the economy and the markets, driven by a catch-up in consumption and accommodating central bank policies, respectively.
For economist Nuriel Roubini, professor of economics at New York University’s Stern School of Business, the omicron variant brings with it the worst effects for the economy: a high level of uncertainty and a likely increase in risk aversion. These factors will have a negative impact on demand and exacerbate supply chain difficulties.
This will amplify the main downside risks identified for 2022.
Towards endemic inflation
Inflation, which Roubini does not see as a transitory phenomenon, but more as an endemic phenomenon, will force central banks to normalise interest rates and abandon unconventional monetary policies. The fear is that with the high level of public and private debt, the rise in the cost of credit cannot be absorbed. Central banks will then be faced with a choice as difficult as choosing between vaccinated and unvaccinated: opt for pandemic inflation or a credit crunch, while keeping an eye on potential bubbles, such as overvalued equities, real estate or “exotic” assets such as cryptoactives or SPACs (special purpose acquisition companies).
Given the rapid spread of the omicron variant, and the challenges this poses in terms of vaccine campaigns and vaccine development, it is extremely difficult to assess the likelihood of the situation being brought under control as early as 2022. Or beyond.
For William de Viljder, head of economic research at BNP Paribas, the basic scenario for 2022 is attractive--real GDP growth should be dynamic, and inflation, while remaining high in the short term, would fall during the course of the year--but it remains highly uncertain, mainly because of the evolution of the covid pandemic. “Given the meteoric spread of the omicron variant, and the challenges this poses in terms of the vaccine campaign and vaccine development, it is extremely difficult to assess the likelihood of control as early as 2022. Or beyond.”
His fear is that the uncertainties associated with the pandemic will become structural and weigh on demand, and that rising sickness absenteeism will disrupt the production, transport and distribution sectors and cause further bottlenecks.
Confidence could also be badly damaged if inflation were to surprise on the upside. This he considers “likely”.
Pictet believes that “the omicron variant may have led to more restraint, but the economic recovery remains resilient. This means that equities do not appear vulnerable to a correction”.
“But the global recovery remains resilient, thanks to a strong labour market, pent-up demand for services and healthy corporate balance sheets. Abundant household savings can also cushion the blow: the IMF expects the global gross savings rate to reach a record 28% in 2022.”
The Swiss bank’s analysts expect global growth to reach 4.8% in 2022.
Despite the emergence of the new variant of the omicron coronavirus, global economic growth will remain robust at year-end.
Guy Wagner, chief investment officer and managing director at BLI-Banque de Luxembourg Investments, is also optimistic: “Despite the emergence of the new variant of the omicron coronavirus, global economic growth will remain robust at year-end.”
According to his analysis, “the likely increase in the number of coronavirus infections and the tightening of containment measures following the spread of the omicron variant are expected to slow global economic growth in the first quarter of this year, but not derail it.”
This article is taken from the Paperjam Finance newsletter, the monthly appointment to follow financial news in Luxembourg. You can subscribe by following this link.