As a tumultuous year for the global economy comes to a close and we step into 2022, it would be fair to say we are not out of the woods yet and several risks remain.
Here is what we expect.
The US: a potential inflation inflection point
Facing slowing month-on-month inflation, we expect the Fed to remain patient in the first half of 2022 and then hike rates twice in the second half, in September and December. As policy normalisation progresses, we expect more intensive debate over the pace of rate hikes, balance sheet policy and the terminal rate. However, should elevated monthly inflation persist, contrary to our expectation, the Fed’s long-held narrative of abating price pressures could collapse, resulting in an earlier, faster and potentially longer hiking cycle to above the neutral rate. We expect real GDP growth to remain robust in the first half of 2022 but slow sharply in the second half, as the fiscal stimulus fades and inventory-building completes.
China: the worst is yet to come
Despite Beijing’s recent shift in policy stance, we expect growth to weaken further in the spring of 2022 on a worsening property sector, rising costs of the zero-COVID strategy, an export downturn and widespread factory closures before and during the Winter Olympics. We expect Beijing to take more decisive action to arrest the downward spiral in spring 2022, and growth could bottom out after that. Most raw material prices have already peaked on falling demand, resulting in PPI disinflation and a modest rise in CPI inflation, so we do not expect inflation to be a barrier to policy easing. Beijing’s easing in 2022 would stand in sharp contrast with most other economies.
Europe: policy unwinding despite Omicron
The Omicron threat has led a number of euro area countries to reimpose restrictions that should slow growth early in 2022. But with inflation surging, we expect the ECB to allow a reasonably sharp pace of tapering from spring 2022, and we have brought forward ECB rate-hike lift-off to mid-2023. Politics will be in focus in 2022, with a new German coalition, France’s presidential election and changes at the top in Italy. In the UK, we expect a modest growth slowdown in the first quarter but for inflation to persist at exceptionally elevated levels for some months and to remain above target until 2023. The Bank of England’s response should be to raise rates to an extent similar to past cycles: we see a 1% Bank Rate by end-2022, with a couple more hikes beyond.
Japan: towards a complete reopening of the economy
Overcoming supply constraints and reopening international travel, we expect the almost full normalisation of economic activity for Japan to eventually be achieved in 2022. However, the main factors that have kept Japan’s inflation momentum low thus far—such as persistently low inflation expectations, Japanese consumers’ high price sensitivity and the resultant reluctance of corporations to hike prices—appear to still be in place. It seems unlikely that Japan will experience, even as a temporary blip, the sort of inflation exceeding central banks’ inflation targets that has been recently observed in many regions overseas.
India: durable inflation, non-durable growth
India’s bumpy cyclical recovery in 2021 should continue in the first half of 2022, even as a still-low vaccination rate increases the risk of virus setbacks. However, we worry about the side effects of loose policies that are visible in the form of high inflation (another year above 5%) and a widening current account deficit. The uneven nature of the recovery has also resulted in scarring effects, hurting the consumption of lower income households, while a sustained capex upcycle is not yet in sight. Overall, we do not see the current growth cycle as durable. With uneven growth, high inflation and wider twin deficits, we expect India’s risk premium to rise, and the Reserve Bank of India to deliver 100 basis points of cumulative rate hikes, but only after falling behind the curve initially.
The rest of Asia: the export tide is turning
While Omicron has increased uncertainty, we see Asia’s bumpy upcycle extending into early 2022, led by reopening and easing supply bottlenecks. However, we expect an export downturn from mid-2022, and are more circumspect on the rotation into domestic demand. Inflation will likely edge higher but, unlike other regions, should generally remain under control, allowing gradualism on monetary policy normalisation. Alongside an export downturn, high debt and scarring effects, we see lower terminal policy rates in this cycle. Relative to consensus, our growth outlook is more positive on Singapore, Malaysia and Taiwan, more negative on South Korea and the Philippines, and cautious on macro risks in Indonesia.
Rob Subbaraman joined Nomura in 2008 and is Head of Global Macro Research and Co-Head of GM Research. He manages a team of over 30 economists and macro strategists that forecast the global economic outlook and make financial market trade recommendations. Rob is also on the Nomura Executive Committee for AEJ Global Markets. Prior to joining Nomura, Rob was at Lehman Brothers for 12 years and was Chief Economist, AEJ. Rob is based in Singapore and has a central banking background, having worked at the Reserve Bank of Australia in the Economic Analysis Department for seven years prior to joining Lehman Brothers.