The Covid years are littered with predictions that didn’t work out. For anyone looking ahead into 2022, that should be enough to give pause.
Most forecasters, including Bloomberg Economics, have as their base case a robust recovery with cooling prices and a shift away from emergency monetary-policy settings. What could go wrong? Plenty.
Omicron, sticky inflation, Fed lift-off, China’s Evergrande slump, Taiwan, a run on emerging markets, hard Brexit, a fresh euro crisis, and rising food prices in a tinder-box Middle East—all these feature in a rogues’ gallery of risks.
Some things might go better than expected too, of course. Governments may decide to keep fiscal support in place. China’s latest Five Year Plan could catalyze stronger investment. Pandemic savings might fund a global spending splurge.
Bloomberg Economics has built a new tool to model global economic risks.We used it to stress-test the world economy in 2022.
Omicron And More Lockdowns
It’s early for a definite verdict on the omicron variant of Covid-19. Apparently more contagious than its predecessors, it may prove less deadly too. That would help the world get back to something like pre-pandemic normal -- which means spending more money on services. Lockdowns and Covid caution have kept people out of gyms or restaurants, for example, and encouraged them to buy more stuff instead. A rebalancing of spending could boost global growth to 5.1% from the Bloomberg Economics base forecast of 4.7%.
Flu Minus Or Delta Plus?
But we may not get that lucky. A more contagious and deadly variant would drag on economies. Even a three-month return to the toughest 2021 restrictions—countries like the U.K. have already moved in that direction—could see 2022 growth slow to 4.2%.
In that scenario, demand would be weaker and the world’s supply problems would likely persist, with workers kept out of labor markets and further logistics snarl-ups. Already this month, the Chinese city of Ningbo—home to one of the world’s busiest ports— has seen fresh lockdowns.
The Threat Of Inflation
At the start of 2021, the U.S. was forecast to end the year with 2% inflation. Instead it’s close to 7%. In 2022, once again, the consensus expects inflation to end the year close to target levels. Another major miss is possible.
Past The Peak?
Omicron is just one potential cause. Wages, already rising at a rapid clip in the U.S., could climb higher. Tensions between Russia and Ukraine could send gas prices surging. With climate change bringing more disruptive weather events, food prices may continue to rise.
Not all the risks are in the same direction. A new wave of the virus could hit travel for example—dragging down oil prices. Even so, the combined impact could still be a stagflationary shock that leaves the Fed and other central banks with no easy answers.