Most of 2020 was disrupted by the economic collapse caused by lockdowns. The great financial markets recovery followed, based on massive cash injections from the central banks, ahead of the revival of the underlying economies. However, 2021 was not a straightforward economic recovery year as the markets were assuming. The virus still stalked the planet whilst people and companies decided they wanted to change the way they did things as some of the controls were relaxed.
Labour markets experienced some severe shortages of skills with a shrunken potential workforce as some decided to retire early. 2022 will still be heavily influenced by the virus one way or another. As we peer into the unknown, we need first to decide whether the Omicron variant and any other variants to emerge next year will be containable or whether they could threaten a return to greater social distancing or even more lockdowns.
Variant deemed controllable
It looks as if the scientific and medical establishment have sufficient of the measure of the virus that we can assume new variants will not give most people serious illness and possible death. If a new variant proves more resistant it is likely the vaccine makers will be able to tweak their products relatively quickly. Meanwhile, there are more drug treatments available that also ease the condition.
The pandemic has brought forward a great revolt against five-day-a-week commuting
It is true there is resistance to comprehensive vaccination in many emerging countries, and continuing arguments over supply and prices of vaccines for these areas. All the time large areas of the world are insufficiently protected the virus has more scope to spread and change. We will assume for our base case that the virus recedes as a force and that from spring onwards there will be further relaxations of rules in the advanced countries of the northern hemisphere.
As saw last summer, this does not mean everything rushes back to pre-Covid-19 levels. Travel and transport will need adjusting to new work patterns, as the pandemic has brought forward a great revolt against five-day-a-week commuting. It looks as if most advanced countries will settle in many cases for a three-day week in the office, with the balance working from home using digital communications.
Train and bus services need to adapt their ticketing and their timetables away from the five days a week commuter peaks. The property sector will continue to shift from shop to online retail, rewarding owners of warehouses more than retail units in all but the best locations. There will be changes to the pattern of office rents and provision, driven partly by new working patterns and partly by green policies requiring buildings to meet more arduous low carbon standards.
Green ambitions driving investment
The year will see a continuing struggle over the pace and magnitude of the energy transition. There is no doubt about the intent of the advanced-country governments to switch power generation from coal and gas to renewables. There are no questions over their wish to decarbonise many industrial processes and all of transport.
There is uncertainty about how quickly they will want to close coalmines and oilfields, and how high they will be willing to push the carbon price and the cost of fossil fuel taxes. The investment theme of backing the green future and gradually writing off and closing down the carbon past will continue. It is also the case that most forecasters expect at least maintained demand for oil this decade, as the developing countries still plan to increase their use of coal, oil and gas. The world will be split between the richer countries hastening the transition – and lower-income countries wanting to use fossil fuels to expand jobs and incomes.
The most likely outcome next year is for growth in the world to be more like the pre-pandemic trend.
The most likely outcome next year is for growth in the world to be more like the pre-pandemic trend. This assumes inflation will come down again in the US and Europe from the highs created by the massive anti-virus stimulus and from the supply-chain and labour-market shortages than have plagued the recovery so far. This will allow more progress in company profits and dividends and might indeed be a more normal year in other ways.
Tiptoeing to recovery
Most of the risks to this outlook are to the downside. Should wage rises escalate and the inflation in prices became embedded by a wage/price spiral, then central banks would need to stop the recovery and take tougher action to rein in prices. If central banks panic over the current inflation, or decide to become more prudent, they could anyway engineer a policy error by overreacting and triggering a downturn.
The virus could bite back and force widespread lockdowns again damaging output and incomes. The tensions between China and the US could gain more momentum, damaging trade – or Russia could overdo its assertiveness in a disruptive way. The green policies could be pressed too hard too quickly, hitting traditional ways of spending, making and travelling. China could mishandle its wish to squeeze out excessive credit and undue speculation from the property sector and some other entrepreneurial areas, casting a shadow over international debt markets and the wider world economy.
There should be a bit more return to be earned from investing in an equity-oriented portfolio.
Overall, we expect to see the major economies tiptoe their way through the minefields of Covid-19, monetary policy and social change without triggering these damaging scenarios. We will be watching wage growth, Covid-19 intensive care admissions, President Xi’s thoughts and central bank rhetoric especially closely as the year advances. There should be a bit more return to be earned from investing in an equity-oriented portfolio, where a saver can afford to take the risk – as the recovery continues and as new patterns of living and fuelling the world offer investment opportunities.
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