December 1, 2021
As we head towards the second anniversary of the COVID-19 outbreak, the virus remains a key concern for investors. While some countries are increasing vaccination rates, others are seeing new outbreaks - and late November saw the emergence of the new Omicron variant.
Nonetheless, we expect major economies to continue their post-pandemic recovery. GDP growth in 2022 will likely be down on 2021’s rebound-driven numbers, but we still expect solid economic expansion.
Any unexpected shocks could raise questions about the ability of the global economy to sustain its pace of recovery. The coming year is likely to see inflation remain a concern, while interest rates will start to rise in many major markets as central banks tighten monetary policy.
AXA Chief Group Economist, and Head of AXA IM Research, Gilles Moëc said: “2021 was a year of fast decompression, with demand catching up quickly as economies reopened, exerting significant pressure on supply, triggering a consumer price rise not seen for decades. We believe 2022 will be a year of gradual absorption of the pandemic shock, with robust but less spectacular GDP numbers, as much of the catch-up is now behind us, and a normalisation of supply conditions allowing inflation to slow down. This would allow central banks to maintain a prudent approach to the pace of policy normalisation.
“It has become impossible to think about the macro outlook without considering the impact of the fight against climate change. An essential part of the process is to reallocate capital towards the sectors and businesses which are transitioning to a net zero economy – the investment effort needed to get there is going to be massive and is already becoming tangible, which we believe will bring a positive contribution to economic growth over this forecasting horizon already.”
Below we outline our summary outlooks for key countries and regions in 2022 and into 2023.
The economic recovery in 2021 gave rise to severe supply chain bottlenecks, but such pressures should ease if COVID-19 is brought under control. These shortages have had a significant impact on inflation, which is on track for a 40-year high, but we expect it to peak at the end of 2021, before falling significantly from the second quarter (Q2) of 2022 onwards. GDP growth should continue at a robust pace, though we expect it to decelerate - we forecast growth of 5.5% in 2021, 3.5% in 2022 and 2.7% in 2023. The Federal Reserve looks set to start a material tightening cycle at the end of 2022, though doubts about managing longer-term inflation suggest this could potentially start sooner.
After a buoyant summer, the short-term outlook is threatened by another COVID-19 outbreak, rising inflation, supply shortages and a slowdown in China. Beyond these, some tailwinds should support Eurozone activity with gradual progress in the labour market, easing prices over the course of 2022 and continued support from governments and the central bank. Overall, we are optimistic on the Eurozone growth outlook, expecting GDP growth of 3.9% in 2022 and 2.1% in 2023. We believe inflation will soften in 2022, to an average of 2% in 2022 and 1.6% in 2023. The political landscape looks positive for the region, but there is some uncertainty, with upcoming elections in 2022 in Italy and France.
China has experienced further economic softening in late 2021 as it navigates a path back from the pandemic. Many of the factors behind this – the troubled property market, the export outlook and COVID-19 - will continue to exert an influence in 2022-2023. Beijing will be forced to recalibrate macro and monetary policy and we expect momentum to improve. We expect full-year GDP growth of 5% for 2022, rising to 5.3% in 2023. However, risks to our forecast are large, biased to the downside, and centre on this difficult balancing act.
Emergency policy response to the pandemic supported the economic rebound in 2021. This will be less prominent in 2022 however, when the recovery will rely more on domestic drivers. Asia should catch up after the Delta variant-induced disruption in 2021, with consumer-oriented economies benefitting. Growth in Latin America is likely to soften to pre-crisis, lacklustre levels. Central Europe should also deliver a soft landing towards economic potential in 2022, from overheating in 2021. Inflation rates have been rising, often beyond central banks’ targets, triggering front-loaded interest rate hikes in Latin America and Central Europe. Asia may follow suit in 2022, albeit more slowly and gradually. Emerging market GDP growth is expected to rebound to 6.2% in 2021 and continue to recover into 2022 with 4.4% growth.
Japan’s subdued growth in 2021 should be boosted by tailwinds into 2022 after the state of emergency was lifted. A new fiscal package should help, as should further efforts to boost digitalisation and tackle climate change as well as an easing of supply chain issues in the auto sector. We forecast GDP growth to average 3.5% in 2022 and 1.6% in 2023, above consensus (at 3% and 1.3% respectively). Inflation should move higher but remains far from the 2% target so we expect the Bank of Japan should maintain its accommodative monetary policy at least until 2024.
Uncertainty surrounds how much further the UK’s recovery can go, given the combined impacts of Brexit and the pandemic – and then there is the fractious political backdrop. Supply chain pressures and energy prices are driving the current inflation spike and we expect it to reach 5% in Q2 2022 before receding in the second half of the year. We forecast GDP growth of 6.9% in 2021, 5.2% in 2022 and 2.3% in 2023. Given signs of labour market tightness and elevated inflation, we expect the Bank of England to raise interest rates to 0.75% by end-2022 and 1% by end-2023.
Looking ahead, AXA IM CIO, Core Investments, Chris Iggo added: “COVID-19 will inevitably remain a challenge for markets. But rising inflation also remains a concern. We are now moving into a phase where interest rates are on the rise and this needs to be built into any investment outlook. But monetary policy tightening looks like it has been broadly priced in, and if actual rises are in line, then bond market losses should not be too significant.
“Equally, equity markets should be able to cope with modestly higher rates so long as corporate earnings keep growing. However, the strong corporate earnings experienced in 2021 look set to recede in 2022 as economic activity normalises.
“The bigger risk to investors is that inflation forces a more aggressive policy response from central banks. That could mean higher bond yields and wider credit and equity risk premiums. At the same time, the growing focus on sustainability will direct private capital into more and more green investments providing a huge tailwind for ESG driven investments well beyond the current concern about inflation and modestly higher interest rates.”