Economic Prospects for 2022

2022 is once again a very complex year to predict, with inflation and central banks capturing a big part of the economic attention. But while making accurate predictions is always challenging, we can assess which part of the economic cycle we are currently in. Cycles have been repeating themselves in similar patterns over the last century and understanding where we are now will give us a better view on what is coming next.

What could we expect in 2022?

1.?????In Europe, this will be the second year of sustained economic growth after the start of the pandemic. GDP growth will be close to mid-digits (+4.5%), a target slightly lower than 2021 where it scored +5.1%. Growth will accelerate in tourist dependent countries, which lagged in the recovery trend in 2021, and decelerate in the rest of Europe. We are still in the middle of a positive economic cycle, which we can expect to continue for another one or two years before economic growth slows down going back to its mean (+2.0%).

2.?????Growth in northern export-driven nations will be looking at news from China. China’s economy is currently in a transformation phase, moving its focus from export and investments, such as construction, to internal consumption. Consumption growth will benefit export countries down the road, but during this transformation phase accidents might occur. We will see restructuring of some heavily leveraged real estate companies, with some main actors falling into orderly bankruptcy. The most likely scenario is that current low public debt will allow the Chinese government to manage a soft transformation through increased spending, keeping the economy and employment moving forward, albeit at a slower pace than in the past decades. Global raw material companies will also be looking at them.

3.?????Inflation will continue to rise higher than the one targeted by the European Central Bank (+2%). We currently see supply-driven inflation, as soaring prices for commodities, energy rates and transportation costs are impacting the selling prices of all goods across the region. Energy prices will continue to be high across the board (gas, oil, etc..), with Brent oil surpassing its 5-year peak ($80+ per barrel). At a global level, the macro-trend of growing energy demand will not pause as it will be fueled by population growth which is expected to continue until 2050 and probably beyond. As energy companies are switching from oil exploration investments into renewables, oil supply will be tight in the years to come. In Europe, the move to renewable energies was courageous, but those alternative energies are still not yet as cheap as fossil fuel, and planned investments in renewables, as big as they can be, will not be sufficient to cover our ever-growing needs in this area. This will imply a transition period where consumers will have to pay the difference and our exports will become more expensive compared to those from other regions. Unsurprisingly, nuclear power and gas production will both be considered by the EU as “green energies”, to allow funding for additional sources of energy and to help soften this transition. The times of zero inflation are over and won’t come back any time soon.

4.??????Europe is a region of ageing populations: this means a shrinking population unless migration closes the gap every year between the number of deaths and new births. In the long run the economic consequences will be a lower supply of work, lower consumption and lower economic growth. As the economy recovers, the job market will tighten, and unemployment rates will go down. The number of young people entering the labor market will decrease, which will accelerate the fight for talent. The impact of the “great resignation” that started lately in the US is still to be assessed, it could be an additional factor of tension on the labor market as people decide to quit their jobs and become self-employed, reducing the labor pool for companies even more. In Europe, demand-driven inflation, coming from salary increases, will not have a meaningful impact in 2022, as the labor market is still less tight than in other parts of the world. This will also be very variable in between individual countries depending on their unemployment rate divergence.

5.??????Thus, European inflation, even if high, should be lower than in the US. The impact will be asymmetric interest rate policies between FED and ECB, and FED will be the first mover with three to four interest rates hike this year. The ECB has the daunting task of normalizing the aggressive expansionary monetary policy that flooded markets with liquidity and lowered interest rates to negative territory. Increasing interest rates could make interest payments a challenge as debt ballooned across the region and cooled down growth. Interest rate increases will be delayed, giving time to inflation to move to lower digits in a natural way. As unemployment is still high in Europe, the ECB is still not ready to change completely their stance on interest rates. I predict that the ECB will lower the injection of liquidity, reducing progressively its monthly bond-buying program. And they will go through the year without increasing short term interest rates, the ones they master. If inflation does not go down, we could eventually see an interest hike in the last quarter of the year.

6.?????Logistic bottlenecks will partially improve as companies adapt their supply chains to the new reality and new capacities are being built. Shipping freight is particularly important as 90% of global trade moves by sea. The balance between offer capacities and demand in freight might have to wait until 2023, as it takes around two years to build a new vessel. Given this supply constraint, the degree of the pain we will suffer in 2022 will depend on demand evolution. During the pandemic, households reduced their spending on services (like tourism and hospitality) and increased their spending on consumer goods. The weight of goods on consumer spending went from 60% to 65% in the US. Would consumption move back to services, this would certainly ease part of the supply chain pain. I am confident that the situation will get better, but not to the extent that we all wish. We will continue talking about supply chain problems throughout 2022.

7.?????The Euro stoxx 50 should have another good year, but returns will be lower than during the 2021 recovery boom. If you calculate the two-year average return 2020-2021, you get close to long term average returns, which confirms that 2021 was an exceptional year and 2020 a low one. There is no investment alternative in Europe where interest rates will remain at historical lows. As inflation hits the real purchasing value of savings, keeping the money in deposits might not seem a great idea. Inflows in stocks will continue in 2022, driving up valuations. The cycle might favor banks, value investment and defensive stocks which are overweighed in the region. Cyclicals could peak in the year as commodity prices stabilize, while oil should overperform.

8.?????Inequality will continue growing as profits are forecasted to grow quicker than the GDP; wealth generation will come more from investments and less from labor savings. Mid- and low-income populations will struggle as inflation will bring down saving rates. Lower unemployment will move consumption up, but middle class consumers will be careful about the choices they make for their purchases which will benefit value-for-money proposals. Purchases of luxury goods will follow the current boom, private boats in particular, as rich get richer and want more leisure time in isolation as a result of the pandemic.

9.?????In the last twelve months, both worldwide scientific coordination to fight the pandemic and investments in research have been the broadest ever. This should be enough to beat the pandemic in 2022 or 2023. Broader vaccination and new treatments will bring down the number of deaths from COVID-19, which will progressively become just another kind of flu. As this happens, tourism and hospitality will boost the worldwide economy with additional spending and employment.

10.??Cryptocurrencies are not just a trend but are here to stay. Bitcoin is now an alternative to money as gold. The cumulated value of gold is four times the value of Bitcoin. New generations are more enthusiastic and engaged with cryptocurrencies than with gold. In the new world of metaverse, people will be buying and owning NFT (non-fungible tokens) such as Luis Vuitton bags that they will be able to show in their digital relations and chats. NFT global market moved from zero to $40 billion last year and might hit $100 billion in 2022. Virtual and augmented reality will expand the possibilities to spend money on digital objects. We can already see this in gaming, where people spend billions to have coins, lives, weapons, or houses that they use during a finite game. Virtual properties will see a boom in the years to come. Blockchain systems will validate the property of these goods, like exclusive watches with a design only owned by you, and all this emerging business might be a booster of cryptocurrencies. There is no underlying fundamental value for Bitcoins and there is no central bank protecting its nominal value, but it seems like this will not really be a problem for the cryptocurrency. It will be also interesting to see what happens when Bitcoin reach the maximum amount that can ever exist, 21 million. It is worth to say that today we are at 19 million. Offer and demand will drive valuation. Trust on cryptocurrencies can be also interpreted as a sign of distrust for the current financial markets and financial institutions by part of the population. I have the feeling that people want to get rich quickly as they have lost faith in getting rich slowly. ?

I am optimistic that 2022 will be again a good vintage. Time will tell us.