Will 2022 be the year where the world economy recovers from the pandemic? That’s the big question on everyone’s lips as the festive break comes to an end.
One complicating factor is that most of the latest major forecasts were published in the weeks before the Omicron variant swept the world. At that time, the mood was that recovery was indeed around the corner, with the International Monetary Fund (IMF) projecting 4.9% growth in 2022 and the Organisation for Economic Co-operation and Development (OECD) projecting 4.5%. These numbers are lower than the circa 5% to 6% global growth expected to have been achieved in 2021, but that represents the inevitable rebound from reopening after the pandemic lows of 2020.
So what difference will Omicron make to the state of the economy? We already know that it had an effect in the run-up to Christmas, with for example UK hospitality taking a hit as people stayed away from restaurants. For the coming months, the combination of raised restrictions, cautious consumers and people taking time off sick is likely to take its toll.
Yet the fact that the new variant seems milder than originally feared is likely to mean that restrictions are lifted more quickly and that the economic effect is more moderate than it might have been. Israel and Australia, for example, are already loosening restrictions despite high case numbers. At the same time, however, until the West tackles very low vaccination rates in some parts of the world, don’t be surprised if another new variant brings further damage to both public health and the world economy.
As things stand, the UK think tank the Centre for Economics and Business Research (CEBR) published a more recent 2022 forecast just before Christmas. It predicted that global growth would reach 4% this year, and that the total world economy would hit a new all-time high of US$100 trillion (£74 trillion).
Both the Fed and ECB are still operating QE and adding assets to their balance sheets every month. The Fed is currently tapering the rate of these purchases with a view to stopping them in March, having recently announced that it would bring forward the end date from June. The ECB has also said it will scale back QE, but is committed to continuing for the time being.
Of course, the real question is what these central banks do in practice. Ending QE and raising interest rates will undoubtedly hamper the recovery – the CEBR forecast, for example, assumes that it will see bond, stock and property markets falling by 10% to 25% in 2022. It will be interesting to see whether the prospect of such upheaval forces the Fed and Bank of England to get more dovish again – particularly when you factor in the continued uncertainty around Covid.