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Inflation and interest rate changes are expected to dominate 2022


Indications are for “less-COVID-19-disruptive-but-still-lower” global economic growth; high but declining global consumer price inflation (CPI); increasing interest rates in most countries; a decline in the All-Commodities Price Index; and less supply chain disruptions in 2022. At the same time, new COVID-19 variant induced lockdowns, as well as intensifying tensions between Russia and the Ukraine and China and Taiwan can change the above expected global economic outcome. In January the International Monetary Fund (IMF) lowered its estimates for global economic growth for 2022 and 2023. The estimate for last year is 5.8%, declining to 4.4% in 2022 and further to 3.8% in 2023. The lower estimated global economic growth rate is driven by a slowing of growth in the USA from 5.6% in 2021 to 4% in 2022, while China’s growth is expected to decrease from 8.1% to 4.8%. The IMF estimates CPI in advanced economies to rise from 3.1% in 2021 to 3.9% in 2022 and then to subside to 2.1% in 2023. The CPI rate for the Euro area is estimated at 3% in 2022 and 1.7% in 2023 and for the USA it is 5.9% in 2022 and 2.7% in 2023. In emerging markets, CPI is estimated to follow the same pattern – increasing from 5.7% in 2021 to 5.9% in 2022 and then declining to 4.7% in 2023. CPI will be kept high by among others high oil prices and global supply chain disruptions. The IMF expects the average oil price (basket of UK Brent, Dubai Fateh and West Texas Intermediate oil) to increase from $69.07 per barrel in 2021 to $77.31 in 2022, whereafter it is expected to decline to $71.29 in 2023. Supply chain disruptions are expected to continue, although less so. The Federal Reserve Bank of New York’s Global Supply Chain Pressure Index (GSCPI), which signals stress in global supply chains, peaked at 4.37 standard deviations from the average in October, but then declined to 4.25 in December.

Developments in the USA, which should again have the largest influence on global share-, bond- and currency markets, took a turn in the last quarter of 2021, with interest rates now expected to increase earlier due to sticky CPI. In January the Fed expected core Personal Consumption Expenditure inflation to average 2.7% (from 2.3% in September) in 2022. The Fed’s median projected interest rate path indicates three interest rate hikes of 25 basis points each in 2022 and 2023 and two in 2024.

In Europe, economic growth will be affected by countries such as Germany and France which tightened lockdown restrictions in response to the Omicron variant. Spillover effects from a hawkish Fed are expected to affect European Central Bank and Bank of England monetary policy meetings. Markets now expect five rate increases by the BoE this year and for the ECB to start hiking in December 2022.

The expected process of sharp economic deceleration in China started. For instance, the economy grew by 4% in Q4 2021, much slower than the 6% to 8% rates we grew accustomed to. Also, in December 2021, retail sales grew by only 1.7% versus a year earlier – the slowest rate on record (other than during the height of the COVID-19 pandemic) – while investment in real estate fell 13.9% compared to a year ago. A slower economy means a deceleration of imports, which will negatively impact the prices of commodities such as iron ore, coal, lumber, steel, and aluminum.

In South Africa, the Reserve Bank increased the repo rate by another 25 basis points and the expectation is for another three increases of similar magnitude. The government’s fiscal deficit is expected to be R80 billion to R100 billion smaller than estimated by National Treasury. However, economic growth is estimated to subside from 4.8% in 2021 to around 2% in 2022. CPI is likely to peak in Q1 2022 and then decelerate to 4% by the end of the year. Multivest Economic Division

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