Gruenwald Learnings 2021 | US Real Time: Omicron | Europe’s Labor Market | EM Chart Pack | Weakest Links | China Property Woes and Bank NPLs

Lots to digest in the final edition of?Essential Economics for 2021! This week I look back and share my main macro learnings for the year: what worked, what didn’t work and what we will take into our macro-credit surveillance for 2022. US Chief Economist Beth Ann Bovino looks at effects on the Omicron variant on US growth, recent inflation prints and the Fed’s accelerated policy rate path. Chief European Economist Sylvain Broyer opined on subdued wage pressures in the Eurozone labor market and appeared on CNBC’s Squawk Box to discuss Eurozone inflation, arguing that the ECB has no need to rush. Our emerging markets team argues for a continued recovery but highlights rising risks ahead in their monthly chart pack. Credit Researcher Nicole Serino looks at the “weakest links” (credits rated B- or lower with a negative outlook) and finds the lowest number since early 2019 on the back of strong earnings. Finally, a China banking team led by Harry Hu notes that defaults are rising among China's property developers, and we estimate that roughly a third of property developers are in some form of financial trouble. This is our final newsletter of the year: have a great holiday and see you in 2022!

Gruenwald Learnings 2021

In a year-end blog post, I look back on 2021 and identify our main macro learnings for the year: what worked (demand centered fiscal policy, vaccinations, and labor market connectivity), as well as what didn’t work (global supply chains and overly sanguine assumptions about inflation).

These learnings will lay the foundation for our macro-credit surveillance in 2022.

To read my year-end blog, click here .

US Real Time: Omicron Concerns

Beth Ann notes that the US economy has remained resilient. Consumers seem willing to spend despite a pickup in COVID-19 cases (particularly with the Omicron variant) and high inflation weighing on purchasing power. With persistently high inflation readings heading into the new year, we now expect the Federal Reserve to speed up tapering to reach 'zero' by March 2022, leaving the year open for at least one rate hike, perhaps even sooner than our forecast of September.

Ongoing supply bottlenecks continue to pose a downside risk, though real-time data continues to suggest that there are some signs off easing across the supply chain

To read the full document, click here .?

Broyer: Where Is European Wage Inflation?

Sylvain argues that wage growth will not outpace productivity next year in the Eurozone, and therefore will not exert inflationary pressure any time soon. The furlough schemes have enabled a smooth recovery in labor force participation, which has already returned to pre-crisis levels. While we expect the European labor market to tighten further, there are still untapped workforce reserves, which seem more easily mobilized than before and point to a structural improvement.

To read the full report, click here .

Sylvain also appeared on CNBC this week to discuss Eurozone inflation and the ECB policy meeting. He noted that while there is a focus on the need to reduce the pace of quantitative easing, there is no rush for the ECB to make a rate decision. Regarding the macro picture, Sylvain noted that the recovery has been delayed by the recent surge in COVID-19 cases.

To watch the interview, click here .

EM Monthly Chart Pack: Difficult Year Ending, Challenges Ahead

Our emerging markets team expects the economic recovery from the pandemic-induced downturn to continue into 2022. Some sectors continue to operate below capacity, which will keep growth above trend next year (with Brazil as the main exception). Financing conditions have tightened, mostly due to rising benchmark yields. Importantly, in some countries the risks are worsening as inflation keeps accelerating, adding to existing challenges.

To access the full chart pack, click here .

Weakest Links Down 50% Year To Date

Nicole reports that the global weakest links tally has fallen by over 50% year to date and is the lowest it has been since April 2019. Although issuers rated 'B-' and below constitute over 30% of speculative-grade ratings, the negative bias for issuers rated 'B-' and below has fallen to a record low of 24%, contributing the most to the fall in the number of weakest links.

Weakest link removals have been mostly due stabilization as negative rating pressure has been somewhat alleviated by earnings trajectories year to date.

To read the full report, click here .

China’s Property Woes and Bank NPLs

Harry and team note that defaults are rising among China's property developers, and we estimate that roughly a third of property developers are in some form of financial trouble. This means that just as COVID-related stresses are easing, property-related pain keeps banks' nonperforming assets elevated. The sector's woes also significantly contribute to our recent downward revision of China's GDP growth, to 4.9% in 2022 from 5.1% previously.

The authorities have fine-tuned credit requirements to provide temporary relief, but investors remain cautious, especially in offshore bond markets.

To read the full report, click here .

Happy Birthday EE, Happy Holidays and Happy New Year!