It\u2019s early for a definite verdict on the omicron variant of Covid-19. Apparently more contagious than its predecessors, it may prove less deadly too. That would help the world get back to something like pre-pandemic normal – which means spending more money on services.<\/p>\n
Lockdowns and Covid caution have kept people out of gyms or restaurants, for example, and encouraged them to buy more stuff instead.<\/p>\n
A rebalancing of spending could boost global growth to 5.1% from the Bloomberg Economics base forecast of 4.7%.<\/p>\n
But we may not get that lucky. A more contagious and deadly variant would drag on economies. Even a three-month return to the toughest 2021 restrictions \u2014 countries like the UK have already moved in that direction \u2014 could see 2022 growth slow to 4.2%.<\/p>\n In that scenario, demand would be weaker and the world\u2019s supply problems would likely persist, with workers kept out of labor markets and further logistics snarl-ups. Already this month, the Chinese city of Ningbo \u2014 home to one of the world\u2019s busiest ports\u2014 has seen fresh lockdowns.<\/p>\n The Threat of Inflation<\/strong><\/p>\n At the start of 2021, the US was forecast to end the year with 2% inflation. Instead, it\u2019s close to 7%. In 2022, once again, the consensus expects inflation to end the year close to target levels. Another major miss is possible.<\/p>\n Omicron is just one potential cause. Wages, already rising at a rapid clip in the US, could climb higher. Tensions between Russia and Ukraine could send gas prices surging. With climate change bringing more disruptive weather events, food prices may continue to rise.<\/p>\n Not all the risks are in the same direction. A new wave of the virus could hit travel for example \u2014 dragging down oil prices. Even so, the combined impact could still be a stagflationary shock that leaves the Fed and other central banks with no easy answers.<\/p>\n Powell-ing Toward Fed Rate Hikes<\/strong><\/p>\n Recent history, from the taper tantrum of 2013 to 2018\u2019s stocks selloff, shows how a tightening Fed spells trouble for markets.<\/p>\n Adding to risks this time around are already-elevated asset prices. The S&P 500 Index is near bubble territory, and home prices accelerating away from rents suggest housing-market risks are bigger than at any time since the sub-prime crisis back in 2007.<\/p>\n Bloomberg Economics modeled what happens if the Fed delivered three hikes in 2022 and signaled it would keep going until rates reach 2.5%, pushing Treasury yields up and credit spreads wider. The result: a recession at the start of 2023.<\/p>\n Fed Liftoff and Emerging Markets<\/strong><\/p>\n Fed liftoff could mean a crash landing for emerging markets. Higher US rates typically boost the dollar and trigger capital outflows \u2014 and sometimes currency crises \u2014 in developing economies.<\/p>\n Some are more vulnerable than others. In 2013 and 2018 it was Argentina, South Africa and Turkey that suffered most. Add on Brazil and Egypt \u2014 call them the BEASTs \u2014 to get the list of five at-risk economies in 2022, based on a range of measures compiled by Bloomberg Economics.<\/p>\n Saudi Arabia, Russia and Taiwan, with little debt and strong current-account balances, appear least exposed to capital flight in the emerging world.<\/p>\n China Could Hit a Great Wall<\/strong><\/p>\n In the third quarter of 2021, China\u2019s economy ground to a halt. The accumulated weight of the Evergrande real estate slump, repeated Covid lockdowns and energy shortages dragged annualized economic growth down to 0.8% \u2014 way below the 6% pace to which the world has become accustomed.<\/p>\n While the energy crunch should ease in 2022, the other two problems may not. Beijing\u2019s zero-Covid strategy could mean omicron lockdowns. And with demand weak and financing constrained, property construction \u2014 which drives about 25% of China\u2019s economy \u2014 may have further to fall.<\/p>\n Bloomberg Economics\u2019 base case is for China to grow 5.7% in 2022. A slowdown to 3% would send ripples around the world, leaving commodity exporters short of buyers and potentially derailing the Fed\u2019s plans, just like the Chinese stocks crash did in 2015.<\/p>\n Political Turmoil in Europe<\/strong><\/p>\n Solidarity among leaders who back the European project, and European Central Bank activism to keep government borrowing costs under control, helped Europe weather the Covid crisis. In the year ahead, both could fade.<\/p>\n A fight over the Italian presidency in January could upend the fragile coalition in Rome. France heads to the polls in April with President Emmanuel Macron facing challenges from the right. If euro-skeptics gain power in the bloc\u2019s key economies, it could shatter the calm on European bond markets and deprive the ECB of the political support required to respond.<\/p>\n Say that sovereign spreads widen by 300 basis points, like they did in the last decade\u2019s debt crisis. Bloomberg Economics model shows that could chop more than 4% from economic output by the end of 2022, sending the euro area into recession and reviving concerns about its viability.<\/p>\n Feeling the Brexit Impact<\/strong><\/p>\n Negotiations between the UK and EU over the Northern Ireland Protocol \u2014 a doomed attempt to square the circle of an open land border and closed customs union \u2014 are set to rumble on into 2022. Getting to yes will be tough.<\/p>\n What happens if negotiations break down? Based on past Brexit flare-ups, the uncertainty would hit business investment and undermine the pound, boosting inflation and eroding real incomes.<\/p>\n In a full-on trade war, tariffs and transportation logjams could push prices even higher.<\/p>\n The Future of Fiscal Policy<\/strong><\/p>\n Governments spent heavily to support workers and businesses in the pandemic. Many now want to tighten their belts. The pull-back of public spending in 2022 will amount to some 2.5% of global GDP, about five times bigger than austerity measures that slowed recoveries after the 2008 crisis, according to UBS estimates.<\/p>\n There are exceptions. Japan\u2019s new government has announced another record stimulus and China\u2019s authorities have signaled a shift to supporting the economy after a long stretch of holding the purse strings tight.<\/p>\n In the US, fiscal policy swung from boosting the economy to slowing it in the second quarter of 2021, according to the Brookings Institution. That\u2019s set to continue next year, though president Joe Biden\u2019s child-care and clean-energy investment plans will limit the drag if they make it through Congress.<\/p>\n Food Prices and Unrest<\/strong><\/p>\n Hunger is a historic driver of social unrest. A combination of Covid effects and bad weather has pushed world food prices near record highs, and could keep them elevated next year.<\/p>\n The last food-price shock in 2011 triggered a wave of popular protests, especially in the Middle East. Many countries in the region remain exposed.<\/p>\n Sudan, Yemen, and Lebanon \u2014 already under stress \u2014 all look at least as vulnerable today as they did in 2011, and some are more so. Egypt is only marginally better off.<\/p>\n Popular uprisings are rarely localized events. The risk of broader regional instability is real.<\/p>\n Politics, Geo- or Local<\/strong><\/p>\n Any escalation between mainland China and Taiwan, from blockade to outright invasion, could draw in other world powers \u2014 including the US.<\/p>\n A superpower war is the worst case, but scenarios short of that include sanctions that would freeze ties between the world\u2019s two biggest economies, and a collapse in Taiwan\u2019s production of the semiconductors that are crucial to global output of everything from smartphones to cars.<\/p>\n Elsewhere, Brazil is scheduled to hold elections in October \u2014 against a backdrop of pandemic turbulence and a still-depressed economy. A lot could go wrong, though a win for a candidate promising tighter control of the public purse could bring some relief to the real.<\/p>\n In Turkey, the opposition is pushing to bring forward 2023 elections into next year amid a currency slump widely blamed on President Recep Tayyip Erdogan\u2019s unorthodox economic policies.<\/p>\n![\"\"](\"https:\/\/businesstech.co.za\/news\/wp-content\/uploads\/2021\/12\/Bloomberg.jpg\")
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