With 2021 in the past, it’s time that investors start to set their goals for the new year and that starts with knowing what to expect from the economy in 2022.
Where the Economy is Now
Global markets are still recovering from the monumental impact that COVID-19 has had as countries are keeping some quarantine measures in place even if for the most part economies have “reopened”. Masks are mandated or strongly recommended in around the world. Meanwhile, supply-chain disruptions continue with shortages lingering as producers are still struggling to keep up with the faster than expected recovery in demand.
Tech hardware such as semiconductors cannot be manufactured fast enough to keep up with high demand. The surging popularity of cryptocurrencies along with powerful computers being used for the increasingly popular gaming industry have also put increased pressure on semiconductor suppliers. The world’s most powerful graphic cards are constantly sold out while Sony and Microsoft’s new gaming consoles are always out of stock as well.
Balance
Finding the balance between supporting a still-recovering economy while combating inflation pressures from aggressive fiscal and monetary policy and supply chain disruptions will be officials primary concerns for 2022. The Federal Reserve has already accelerated the tapering of asset purchases going forward and is expected to raise interest rates throughout the year with the first hike potentially coming in just two months.
The tightening of monetary policy and diminishing base effects from the initial pandemic shock are big drivers in the consensus GDP-growth forecasts being lower in 2022 than this past year.
Economic Forecasts for 2022
GDP is expected to grow 4.3% globally this year with the United States gross domestic product expected to rise 4.0%. Meanwhile, Morgan Stanley expects global and U.S. GDP growth for 2021 to have been 6.1% and 5.5%, respectively. Less aggressive monetary policy along with expected tighter fiscal policies are two big reasons for the expected decrease in growth.
Massive stimulus measures were passed in 2020 and 2021 that helped keep the economy afloat. However, now with high inflation and lack of bipartisan support for more stimulus (such as President Biden’s infrastructure bill), the focus is turning to how to avoid an overheating economy.
Unemployment Projections
Additionally, much of this reduction in expected growth from 2021 simply comes down to time and cycle of the recovery. Growth slows as the economy recovers and starts to push forward as it's much easier to drop the unemployment rate from 6% to 5% than it is to fall from 5% to 4%. The Fed actually expects the average unemployment rate in the U.S. to fall from 4.5% to 3.8% between now to the end of 2022. If reached, 3.8% would match where it was in March of 2019, just under a year before the pandemic.
Will Prices Continue to Rise?
Lastly, inflation rising at a 6.8% annualized rate in November took the market by storm as traders keyed on the exceedingly high number. Investors can sigh some relief for 2022 though with inflation projections coming in at 2.3% according to Trading Economics metrics.
The 2022 projections are much more in line with the Federal Reserve’s targeted annual rate of 2%. The global pandemic certainly shifted the Fed’s goals however as loose policy measures helped lead to higher inflation. Rate hikes, tapering of asset purchases, and overall tighter policy will certainly help lead to the more “normal” projected rate. Additionally, short term pressures from supply chain issues and shortages are being slowly resolved with time.
A projected slightly over 2% inflation isn’t exactly great following 2021’s very high inflation, but a more normal inflation rate would be wonderful given the surge in prices experienced across many industries in 2021.
Wrapping Up
2021 was a mixed year for many but vaccines being approved right before the year started helped lead economies return closer to normal. Markets experienced a strong recovery from the pandemic but not without plenty of roadblocks such as the massive supply chain disruptions and price hikes. It’s certainly not a buyers' market for housing and perhaps what most investors want is a cooling off in certain markets or bubbles. 2022 may end up being the year of cryptocurrency or perhaps just another correction for crypto while other, more traditional, industries experience slow growth with minimal inflation. Overall, 2022 doesn’t look like it will be as exciting, but that’s probably for the best.
