Will the Economy Be More Normal in 2022?

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Luc de la Durantaye

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Luc de la Durantaye, chief investment officer, CIBC Asset Management.

Since the pandemic, we’ve experienced sort of abnormal macroeconomic and financial circumstances. You had a big drawdown in the economy. You had a big recovery, very fast. Everything was big… Monetary stimulus, fiscal stimulus. And so 2022 could be the start of more of a normal environment, both on the economic and the financial market. What I mean by that is you’re going to have more moderate growth in 2022 from 2021, but it’s still going to be growth that’s going to be above potential. There’s going to be also a normalization in the sense we’ll be less dependent on fiscal spending, because fiscal spending will moderate in 2022 as governments retake control of their expenses.

Monetary policy will be removed in terms of its very large accommodation, because of inflation pressure, so that’s going to be a drag on the economy, but the real economy will improve. You’ll have inventories rebuilt. Consumers will return to consuming more services, less goods, so that’s going to be a bit more normal as well. And finally, companies will start reinvesting in new technologies and improve the supply chains, so that should be more supportive for growth. The net of those two should still lead the global economy with 3.8, 4% growth for 2022. That’s a bit below consensus, which is different from where we were. We were much above consensus in our forecast in 2020 and 2021. But still, that’s a more normalization of the economy.

You could see that also in peak inflation. You’re going to have a renormalization of inflation. It will still stay above the 2% target of central banks in 2022, but the reopening should normalize the demand. Less demand for goods, more demand for services. You’ll be left with a labour market that’s still a little tight and that’s where the above inflation call will be, probably because the labour market and a little bit of the housing sector will keep inflation higher than prior pandemic. But other than that, I think we see that bit more normal environment, a bit more return to normal, hopefully.

Behind our scenario, our main scenario, there’s underlying assumptions. The main ones, I’d say the evolution of the pandemic has left a big footprint on the economy. So there, our assumption is that the combination of increased vaccination, higher natural immunity to the large Omicron infection, and improved accessibility to new therapeutics will mean that the world economy will live with the virus. And we’ll be able to live with the virus with more limited economic impact. That’s one important assumption.

The other assumption that is tricky is the policy normalization, both in fiscal and monetary, starts from historically high levels of accommodation. So the normalization is going to be a tricky part, and its impact on the economy will be more uncertain than usual. As an example, the Fed’s balance sheet is currently close to $9 trillion, and that’s from less than $4 trillion before the pandemic alone. So just in two years, you’ve had massive buildup in the balance sheet. They have announced that they want to normalize the balance sheets, and that involves removing a very large sum of liquidity from the economy, which has never been done before, so that creates a certain degree of uncertainty as 2022 evolves.

The other risk that we will want to watch is, for example, the midterm election in the U.S. We know the U.S. continues to be increasingly divided, and so that’s certainly going to create some volatility. OPEC’s normalization of oil production, the relationship between the U.S. and Russia… All the oil complex is going to be something to really watch carefully. And of course, the U.S.-China relation in the context of the midterm U.S. election and the competition around technology and geopolitical positioning, that’s also going to be things that could positively evolve or negatively evolve the outlook for 2022. We have an eventful year ahead of us, that’s for sure.