Two years after it first emerged, the COVID-19 pandemic continues to cast a pall over the world economy. Rates of vaccination and GDP growth vary wildly between and within developed and emerging markets (DMs and EMs), and the emergence of the new Omicron variant is posing a downside risk to growth and policy expectations worldwide, as are geopolitical factors. The only guarantee is the unevenness of their impact.
As of December 2021, little is known about the new Omicron variant of COVID-19, other than that it is highly mutated and spreading rapidly. Its emergence has dampened economic expectations for the first quarter of 2022 but its effects are unlikely to be felt equally, given the gulf in vaccination rates and capability between developed and emerging markets.
Omicron is not the sole concern when it comes to 2022 growth. Supply-chain problems continue to beset many industries, notably those reliant on semiconductors. Stimulus programmes that supported growth in many economies throughout 2020 and 2021 are being wound up. Headline inflation is spiking in the United States and other key markets, leading to rate hikes that could disproportionately hinder EMs. At a geopolitical level, the Russian military build-up on the border with Ukraine has raised the risk of military escalation in eastern Europe and sanctions risk for Russia.
A potential upside surprise for China
Despite these headwinds blowing very differently for different parts of the world, Standard Chartered is cautiously optimistic when it comes to EMs in the coming year. The under-performance of EM assets is a trend that was visible long before COVID-19 – for example, EM equities have trailed DM equities for the last decade.1 There are, however, a few factors that could change this picture going into 2022, including strong global demand for commodities and the possibility of China delivering an upside economic growth surprise.
China recovered very well from the early stages of the pandemic, but growth has slowed perceptibly in recent months as a result of a number of factors: among them power outages, zero COVID strategy, macro policy normalisation and regulatory tightening – particularly in sectors such as property, education and internet platforms.
As a result, China may struggle to maintain the same pace of expansion in 2022 as it posted this year. Nevertheless, we forecast growth of 5.3% for the world’s second-largest economy, which is above consensus. While we don’t expect the Beijing authorities to reverse policies that have created headwinds for the economy, there are already signs that they are being scaled back somewhat; the government will be reluctant to see actual growth deviate too far from potential growth.
When it comes to foreign exchange, the CNY remains an overweight call for Standard Chartered, with more near-term appreciation likely on the back of China’s sustainable surpluses. We expect Chinese rates to remain range-bound for 2022, declining further in the medium term.
China’s performance will support growth across the interconnected Asian region. We anticipate growth in India to be around 8% in 2022 and foresee a cyclical upswing in Southeast Asia. Malaysia stands out as an economy that tends to prosper in an environment of high inflation and commodity-price expectations. However, ASEAN countries such as Thailand and Indonesia will be held back by the pandemic’s ongoing damage to their tourism industries.
EMs beyond Asia
Higher commodity prices will also lift hydrocarbon economies in the Middle East and North Africa, particularly those of the GCC, which are aided by superior vaccination rates. By contrast, Sub-Saharan Africa, where Omicron was first detected, has vaccination rates that are much lower than the world average, which may hold it back.
Latin America has been notable for a strong recovery across many of its economies and robust commodities demand should support further growth, but as elsewhere the region faces headwinds going into 2022. Rising inflation has been matched by an aggressive response by central banks. Argentina2, Brazil3, Chile4, Colombia5, Mexico6 and Peru7 have all raised rates, in many cases sooner than expected. Many of these central banks are likely to reach the peak of the current cycle in the next few months, but rate cuts are unlikely until 2023.
Political risk is another cloud going into the new year. In Peru the new administration is still bedding in,8 while Chile faces a presidential run-off election between starkly opposed candidates on 19 December.9 Colombia holds presidential elections in May 202210 and Brazil has presidential and congressional elections in October. These electoral exercises are taking place within the febrile social and economic atmosphere created by the pandemic, with political radicalism a possible consequence. Vaccination rates in the region have improved dramatically11, but they may still not be enough to prevent serious disruption if Omicron proves to be a serious setback in the race against COVID-19.
Dilemmas for DMs
Elsewhere in the Americas, mid-term elections will be held in the United States in November 2022, with President Joe Biden’s chances of enacting further change greatly contingent on their outcome. Standard Chartered is more cautious for US growth next year than the market consensus, seeing it coming in at 3.4%, again amid the dampening effect of Omicron on Q1 activity.
Nevertheless, the unemployment rate is close to the Fed’s long-term target and core and headline inflation are well above it. Amid concern about persistent upside inflation risk, many Federal Open Market Committee participants have argued for speeding up tapering, now likely to be done by mid-March, and more rapid consideration of policy rate hikes. We now expect the Fed to raise policy rates by 25bps each in March and June 2022.
That said, circumstances in H2-2022 are likely to look very different, with supply constraints in durable goods likely to ease, inflation moderating and employment growth roughly at potential but with the employment-to-population ratio below pre-COVID trend levels. With a reduced upside inflation risk, the need to raise policy rates quickly will probably have abated.
We are relatively cautious about Europe, where even prior to Omicron a winter wave of COVID had prompted the imposition of new social curbs in many countries. These curbs are likely to be felt in terms of slower growth into the first quarter of 2022 at least, leading us to anticipate 4% Euro-area growth for next year, again below market consensus. The escalating tensions caused by a Russian troop build-up along the border with Ukraine add another source of instability.
In terms of the permanent effects of the pandemic, one region’s loss could be another’s gain - for example, if European manufacturers bring supply chains back from distant destinations such as Taiwan or Vietnam to Central or Eastern Europe. But hopes of a synchronised global recovery in 2022 are fading.
One long-term risk is that the permanent damage done to some EMs is such that they feel they can no longer afford the reforms needed to modernise and streamline their economies, permanently hindering their growth. Just as Omicron has spread from mostly unvaccinated emerging markets to those of the developed world, so too is it a mistake to assume that economic dislocation in one part of the world is something the rest can safely ignore.