Global 2022 Outlook - Still battling headwinds (Part 2)
The desk anticipates that the global economy will continue to grapple with inflationary pressures while seeking growth opportunities in 2022. Per the full note from Standard Chartered, economists Eric Robertsen, Razia Khan, and Edward Lee emphasize that inflation remains a critical concern, potentially impacting central bank policies and market dynamics. With inflation rates projected to remain elevated, traders should be prepared for volatility as central banks navigate these challenges. Our analysis aligns with the broader market sentiment but highlights specific growth sectors that may benefit despite these headwinds.
What the desk is arguing
The desk believes that inflation will be a dominant theme in 2022, influencing both monetary policy and market behavior. Per the full note from Standard Chartered, the economists project that inflation rates could remain above 3% in many advanced economies, prompting central banks to reassess their strategies.
Supporting this view, recent data indicates that consumer price indices have surged, with the U.S. CPI reaching 7% year-on-year in December 2021. This inflationary environment is likely to lead to a tightening of monetary policy, particularly from the Federal Reserve, which may impact currency valuations.
Where it sits in our coverage
Our consensus target for the EUR/USD is set at 1.075, with a range of 1.04 to 1.12. Notable firms contributing to this outlook include: - jpmorgan: Target of 1.10 for Mar26 - bofa: Target of 1.04 for Mar26
This perspective aligns closely with jpmorgan, which anticipates a stronger euro as growth opportunities emerge, while bofa remains cautious, reflecting a more bearish outlook on the euro amidst persistent inflation concerns.
How other firms see it
Firms such as jpmorgan and citi share a bullish outlook on the euro, expecting it to appreciate against the dollar as growth sectors recover. Conversely, bofa and deutsche maintain a more cautious stance, anticipating that inflation will hinder growth and lead to a stronger dollar.
Traders should keep an eye on the EUR/USD trajectory, which is closely tied to the ECB's monetary policy decisions, as well as U.S. inflation indicators that could sway market sentiment.
What the calendar says
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Key takeaways
01Inflation remains a critical concern for the global economy in 2022.
02Central banks are likely to adjust policies in response to persistent inflation.
04Market volatility is expected as traders react to central bank signals.
Market implications
Traders should monitor the EUR/USD pair closely, particularly as inflation data is released and central bank meetings approach. A break above 1.10 could signal a stronger euro, while a dip below 1.04 may indicate renewed dollar strength.
Hello and welcome to this special podcast from Standard Chartered and this is part two of our conversation about the global outlook for 2022. I'm Manisha Tank. We know it's a new year, but one of the big topics that we're talking about is inflation.
It's very much on the march, it seems, and interest rates could be too. But does that mean that it's all doom and gloom? Joining me to have a look at the outlook for 2022, Eric Robertson, Global Head of Research and Chief Strategist, Razia Khan, Head of Research, Africa and the Middle East, and Edward Lee, Chief Economist, ASEAN and South Asia.
Let's get into it. Razia, inflation is very much a mainstreet problem at the moment. There seems to be a lot of fear and anxiety over prices right now.
Can we just talk a little bit about what that means for emerging markets? If we look at recent inflation prints, especially for developed markets, everyone has been surprised by the strength of inflation. But the key question, especially for policy going forward, is how long lasting is this going to be?
And our view very much is that, yes, we saw the pressures to do with the reopening of economies. We can't ignore the supply chain disruptions. Omicron could pose a further threat in that regard.
We know that there have been other factors driving energy prices, especially in the context of what's been going on in Europe in the middle of winter. But the question is, are these likely to be factors that lead to persistent levels of higher inflation over time? And our belief is that this is not going to be the case.
What does this ultimately mean for emerging markets and frontier markets? Inflation in ASEAN hasn't necessarily moved out of the ranges that we might consider normal. In the Middle East, inflation is still at very subdued levels, reflecting what we had seen even pre-Covid.
In Africa, we have seen the pressures of higher energy prices and some instances higher food prices. But these are not necessarily abnormal inflation ranges. We think that there is a case for policy normalisation.
We're likely to see this. We do not see this as a big threat to new inflows into the region. Eric, when it comes to the inflation question, it's an issue that's really hitting Main Street and by extension, of course, overall sentiment.
But is that something we will continue to see this year? There will be a lot of case-by-case discussions. Inflation is certainly problematic in some places.
Latin America is an example where inflation has been fairly pervasive and has led to already a fair amount of central bank tightening. However, if we look at Asia, especially parts of ASEAN and even parts of North Asia, inflation remains relatively low. That is providing central banks an enormous amount of flexibility to hold off on tightening monetary conditions too quickly.
China is obviously a big factor in the inflation debate. PPI, factory gate prices, were extremely strong in 2021 and it provided an early warning of some of the global inflation problems. But we're already seeing PPI in China come off of the highs and it's our expectation that we could see a fairly significant decline in PPI over the course of the year.
This regional divergence across emerging markets is going to be a very important guiding post for how investors approach emerging market assets this year. Let's talk about South Asia. Edward, headlines continue to point out the strain that 2021 took on certain economies.
Let's take India, for example. Unemployment levels, which are of concern. What's in the outlook?
For the case of India, if you take a look at the unemployment levels, at its peak during the COVID crisis was over 20% sort of levels. Now we are probably talking about somewhere around a 7% handle and compare that to a pre-COVID levels of around 6%. In that sense, absolute numbers are still challenging.
But actually in terms of the overall rate, the recovery has been extremely encouraging. And not just for India, if I look across ASEAN, it's quite a similar story. Job recovery has been pretty impressive.
From a labour market perspective, it's not back to pre-COVID on an overall basis, but it's certainly closing in quite rapidly. It might be a nice opportunity for us to talk about what's growing and what will excite us for the coming year. Eric, let's begin with you.
Is there anything that we should be writing home about? There are some unrecognised opportunities that are worth exploring. Southeast Asia, and I think that's certainly an important one.
Europe is going to present some interesting opportunities. The European economy has lived with negative interest rates for a long period of time. And there is some early evidence that perhaps interest rates in Europe will move back into positive territory.
And I think that would be important in terms of signalling greater confidence in the region. The growth story there could perhaps be a net positive for global growth. If we were to see a more proactive policy response in China, either on the fiscal side or the monetary side, that could provide much needed support not only for China, but for the region as well.
We know there's a heavy dependence on trade in the region, and a stronger China certainly augur well for intra-regional trade and may provide positive surprise to the marketplace. That naturally leads me to Edward, to talk about Asia's engine of growth. Will it continue to be China?
Are we going to see some significant rise for the ASEAN region this year of the tiger? ASEAN should play catch up, going back towards its trend growth. And if I take a look at what has been lacking over the last couple of years due to COVID, one is the consumer.
Assuming our base case assumption of a smoother COVID year, I would expect to see better job market, better wage growth prospects and helping in terms of the household consumption sort of a coming back to support growth in 2022. The other place that's lacking due to COVID is on the investment front, more so on the private investment space. And here, perhaps it's a combination of both demand and supply side issue.
But I think what we're seeing is FDI, I think that interest has shown to be very strong. And the new focus on green energy, green infrastructure, and accelerated investments into moving businesses to digital platforms. I think these are some of the areas that ASEAN will grow in 2022.
Razia, the growth opportunity in Africa has been apparent for a very long time. Is this going to be the year that we see the infrastructure spending, particularly when it comes to sustainable projects, see a jumpstart? There's a great deal more financing available to help with that climate transition.
The relative winners are likely going to be those producers of the metals that will be very important in that transition to cleaner energy. The copper producers like Zambia, the platinum producers like South Africa will likely continue to see a mining boom on the back of that. And that means it isn't necessarily an even growth picture at all.
The countries that play a bigger role in the climate transition are likely to see the benefits of that. And this will be reflected in private sector activity. In a lot of instances, it's not going to be that dependent on public spending alone.
Razia, I wanted to hear a bit more, though, about the potential for increased private investment in Africa. It seems to me that we can't be sure how things are looking, but I would love to know what you think. There are growth challenges.
When we look at any of the regions that saw the accumulation of higher levels of public debt, the question inevitably is how do they cope with the deleveraging? And different regions respond to this in a different way. If you look at the resource rich Middle East, there had been a great deal of government spending fueling growth in the Middle East in the past.
What we're increasingly going to see over the coming years is greater reforms. If you look at what's been happening on the citizenship and residency liberalization rules in the UAE to compensate for having a relatively small population, reforms opening the way for more private sector driven growth in Saudi Arabia. This fundamentally means we could be seeing a turn in the growth models.
In the past, growth happened when governments were spending more. In the future, especially in the Middle East, a lot is going to be much more dependent on those liberalization reforms that are taking place. Africa is equally instructive.
When we think of some of the commodity dependent economies in the region, public expenditure, infrastructure spending has played a big role in driving growth in the past. What has been in focus in the press recently, that China lending to Africa had probably peaked a lot earlier than many believe. 2013 in aggregate, if we exclude Angola, including Angola, China's lending to Africa peaked as early as 2016. The sources of financing for the infrastructure fuelled growth are going to be different.
And this means the extent to which different governments embrace reform, making it easier for the private sector to emerge as that driver of growth. This is going to be a very key factor in driving outcomes. It seems like there's a bit of turbulence ahead, at least in the short term this year.
What would need to be in place for us to see things pick up? Eric, let's begin with you. There's a couple of interesting angles to focus on.
Number one, we have seen some early evidence that Omicron cases are coming down quite quickly in places like the UK and South Africa. And while it might be too early to draw any broad conclusions, if there is increasing confidence, for example, that this particular surge in COVID is going to be short lived, that might create quite a bit of optimism around the global economic recovery. Second factor is obviously inflation.
There's some of the very early signs out of places like China that inflation is coming off the boil, and we were to see more broad based deceleration in inflation statistics. Again, that might give the global economy and global markets quite a bit of optimism. The final point is with regards to the Fed.
I think the market is getting a little bit overexcited about the potential magnitude of rate hikes this year. If the Fed were to come out and say, look, we will be raising rates, but we will take a measured and an appropriate response. That may give the markets increasing confidence that the Fed is less of a threat than some people had feared.
Razia, when do you expect things to pick up? One of the big lessons of 2021 is even where COVID is still an issue, the fact that there is a normalization of demand elsewhere, global trade starts to grow again. This helps to lift prospects for everyone.
And we expect this to be reinforced in 2022, notwithstanding the Fed's tightening. If demand is recovering, if conditions are normalizing, that is probably good news for everyone. And I think that more than anything is likely to be a fundamental driver of growth prospects going forward.
Edward, when do you see things picking up in Asia, across ASEAN, in South Asia? If we go back to earlier half of 2021, growth was already picking up, but it was certainly very bumpy. Depending on which country you are in, COVID hit and there was lockdowns.
And then suddenly your recovery got disrupted, number one. And number two was the unevenness, either from a geographical perspective, back to the majors doing so much better in 2021 versus ASEAN, or from a sectorial perspective, where we saw that the gap between say sectors such as finance, manufacturing versus tourism related sectors, transport and storage, food and accommodation still being very uneven. From that perspective, I'm looking into 2022.
And I do think we have some of the very important prerequisites, for example, vaccination status for Asia in terms of levels is so much better. And looking at how they are tackling Omicron, governments are being very watchful, but at the same time being very tolerant as well. Living with the pandemic, I do fear that the concerns are there if we have another devastating variant.
But I would say looking through this year, we do expect that recovery to continue and that unevenness to sort of narrow through the year. Thank you so much to the three of you, Eric Robertson, Razia Khan and Edward Lee. I'm Aneesha Tank.