2021 brought us the hoped-for economic recovery. But it turned out to be weaker than many economists had predicted at the beginning of the year. Despite the vaccines, Corona noticeably slowed the service sector, and overall the global supply chains could not withstand the sharp rise in demand for goods. In connection with the significant increase in the price of energy and raw materials, this triggered an unexpectedly strong surge in inflation.
The business year 2022 is likely to start under difficult conditions worldwide – characterized by low growth and high inflation. However, this stagflation will not be with us all year round. Economic improvement is in sight, at least if the new Omikron virus variant does not result in new global lockdowns.
The decisive factor for the recovery of the economy will be that the capacity bottlenecks, for example in the case of semiconductors, raw materials or transport services, are reduced through increased supply. This can be expected, because the high prices promise good profit margins and thus offer a strong incentive to invest in increasing capacity.
An acceleration in growth is unlikely to fail due to the development of demand. First, the manufacturing companies will work through the order backlog that has built up over the past few months. At the same time, consumer demand from private households is likely to continue to rise. In most regions of the world, significant increases in income can be expected – not least because of falling unemployment figures.
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All in all, after a weak start to the year 2022, the global economy should grow by around five percent, with the growth rates of the USA, Europe and China likely to converge. Against this background, the major central banks have to adjust their monetary policy again to accelerated growth and relatively high inflation. Although inflation rates will decline somewhat in the course of the year, they will remain well above the central bank target values for many months to come. That calls for further monetary policy corrections.
Slight increases in capital market returns are to be expected
When exiting the crisis mode, however, the central banks will proceed cautiously in order to impair the financing conditions for the states and the development of the financial markets as little as possible. First of all, growth in the inflated central bank balance sheets will be scaled back, then interest rate hikes are to be expected.
The US Federal Reserve will have ended monthly bond purchases by March and will probably begin the first rate hikes around the middle of the year. The European Central Bank (ECB) will also end its PEPP crisis program by March and will not fully utilize the ceiling. Should price inflation in the euro zone again be stronger than forecast in the ECB’s projections in 2022, and this is probable, the first interest rate hikes can also be expected in the monetary union at the end of the year.
That should at least result in a slight increase in capital market returns. The central banks will prevent an all too rapid rise in interest rates, which would shake up the financial markets and prevent “favorable financing conditions”. But they should tolerate a gradual increase in returns. Despite this increase, bonds will not be an attractive alternative to stocks or other tangible assets from a return point of view. Investors will continue to direct a lot of capital into real stocks that offer some inflation protection. Stocks, holdings, real estate and gold should be one of them.
Even if these forms of investment involve risks and are quite expensive after the stormy price development of the past year and a half, they still promise decent returns compared to fixed-income investments. Because with increased inflation, the valuations of real asset investments are likely to continue to rise, at least at a moderate pace.
A worst-case scenario is unlikely
The risk of a share price collapse, as last year, cannot be completely ruled out, but it is an unlikely worst-case scenario. However, investors have to be prepared for one thing: Monetary policy will no longer have the leeway in 2022, the financial markets against all negative developments shield as it was previously the case with the corona pandemic. It can no longer act as a “shock absorber” to such an extent.
Therefore, the narrative that monetary policy will fix it when problems arise is likely to get clear scratches. Because even if the inflation targets are temporarily missed, the central banks cannot constantly increase the dosage of their medicine. Investors are therefore well advised to expect higher volatility, including more frequent setbacks in the markets, and to monitor inflation dynamics closely.
In addition to inflation, sustainability aspects should also shape the financial markets in the coming year. Numerous initiatives work together here: final decisions in the European Union which activities can be considered sustainable. The planned additional regulations and rules for the disclosure and accounting of company activities in the areas of environment, social and governance also have consequences. The ECB is also involved, which will significantly tighten reporting requirements for banks and require extensive stress tests with a view to climate risks.
Financial service providers are also obliged by the EU plans to address customers about their sustainability preferences. This threatens to increase the already quite confusing variety of sustainable products. Rating agencies, consumer advice centers and research institutes will increasingly check whether the offers can really be viewed as “green”. Companies will step up their programs to reduce pollutants and reduce energy consumption. This is very desirable, but it also ties up resources, which in the end also leads to higher prices.
Geopolitical tensions will increase
On the world political stage in 2022, setting the course in climate policy or the introduction of global tax standards are likely to play the main roles. The pace of progress in Europe depends not least on Germany and France, where new governments could take advantage of the early hour.
Heightened geopolitical tensions will arise from the growing current account deficit in the USA and the simultaneously growing surpluses of China. A quick settlement of the trade and technology-political conflicts between the two superpowers is rather unlikely – especially since China, with increasing state interventionism, is focusing on strengthening its economic independence and articulating its own regional political claims more and more clearly, for example in the South China Sea. The European Union should prepare for this conflict situation in good time.
More: What else can stop the high inflation?