The global economy is entering 2022 in a weaker position than anticipated according to the latest outlook from International Monetary Fund (IMF). The coming of the Omicron variant led to increased mobility restrictions and financial market volatility at the end of 2021.
Supply disruptions have continued to weigh on activity. Meanwhile, inflation has been higher and more broad-based than anticipated, particularly in the United States of America.
At the same time, the retrenchment in China’s real estate sector appears to be more drawn out and the recovery in private consumption is weaker than previously expected.
Apart from the pressures mentioned, the world economy is set to be shaped by the following four forces:
The Covid-19 Pandemic
The world is still under the new normal that will not be melting away soon. The Covid-19 pandemic continues to sweep across the world with new variants emerging often. Since the start of October, COVID-19 deaths have averaged about 7,000 a day worldwide, down from about 10,000 in late August.
The diffusion of vaccines—although still uneven—has played a major role, with over 55 percent of people said to have received at least one dose. Yet the emergence of the Omicron variant in late November threatens to set back this tentative path to recovery.
As of mid-January, Omicron appeared to be more transmissible than Delta, but its symptoms are perhaps less severe. The net effect on hospitalizations and deaths is still unknown.
“Some emerging market and developing economies are anticipated to fall short of the vaccination target in 2022 and achieve sufficiently broad coverage only in 2023.”
Supply Disruptions
2021 witnessed a lot of supply disruptions due to mobility disruptions that were brought about by the Covid-19 pandemic. According to IMF, supply disruptions continued into the fourth quarter, hindering global manufacturing—especially in Europe and the United States.
In China, disruptions from COVID outbreaks, interruptions to industrial production from power outages, declining real estate investment, and a faster-than-expected withdrawal of public investment all contributed to a second-half slowdown.
With the continuous mutations of the virus, 2022 might experience disruption in supplies as countries are likely to shut down their borders to keep out the emerging variants.
Price Pressures
The emergence of a new variant is not the only risk that has crystallized in recent months. Inflation continued to rise throughout the second half of 2021, driven by several factors of varying importance across regions.
Fossil fuel prices have almost doubled in the past year, driving up energy costs and causing higher inflation, most prominently in Europe. Rising food prices have contributed to higher inflation, for example in sub-Saharan Africa.
Meanwhile, ongoing supply chain disruptions, clogged ports, land-side constraints, and high demand for goods have also led to broadening price pressures, especially in the United States. Higher imported goods prices have contributed to inflation for example in Latin America and the Caribbean region.
Monetary Conditions
In the United States, with price and wage pressures broadening, the Federal Reserve decided to accelerate its taper of asset purchases and signaled that it will raise rates further in 2022 than previously expected.
The European Central Bank (ECB) has announced it will end net asset purchases under the Pandemic Emergency Purchase Programme in March 2022, while it will temporarily increase net purchases by a modest amount under its longer-standing Asset Purchase Programme.
