As we head into the home stretch of the year, our eyes turn to next year’s economic and investment landscape. If we compare the current conditions with those of last year around this time, we will see a clearly different picture.
At the end of last year, investors were expecting a rosy picture for the New Year. The results of the US presidential election, with a calm and cautious Joe Biden replacing a combative Donald Trump, as well as the announcement of the successful development of a vaccine to prevent Covid-19, had raised hope investors.
The investment climate was excellent in the first half of the year, in part due to massive stimulus measures, both monetary and fiscal, by central banks and governments to combat the effects of the pandemic. Some have called the situation “too good to be true”.
Moving on to the second half, the picture began to change. In China, the Communist government has announced a “common prosperity” policy to promote equality, which essentially involves tightening control over companies that authorities consider risky, such as fintech, tutoring schools, online games. line, real estate, mining and others.
This policy move by Beijing has led to increased risks to the economy and investment, magnified by the problems facing China’s second-largest real estate company, China Evergrande. The risks are compounded by the “zero-Covid” policy, in which the government is prepared to lock up millions of citizens whenever an epidemic begins, and the energy crisis that emerged in the second half of the year.
In developed market economies we are starting to see greater risks, both from high inflation that lasts longer than many pundits and central bankers expected, and renewed fear of a new wave of Covid contagion, particularly in Europe. News from South Africa late last week of a disturbing virus variant is sure to spook nerves further.
In addition, the tightening of fiscal and monetary policies is beginning in several countries. We have seen interest rate hikes in New Zealand and South Korea, and reduced monetary stimulus (quantitative easing) in Canada, Australia and the UK. But with a lot of cash flowing right now, investing in risky assets always gives a good return.
OECD USEFUL DATA
The question is, what will the global economic and investment situation look like next year? Perhaps the simplest answer can be found in the OECD Leading Economic Indicators, which assemble a large amount of data to forecast activity over the next 6-9 months. It shows signs of a peak growth ahead in the United States, Japan, Germany and the United Kingdom, and growth starting to slow in Canada and Italy. In emerging markets, slower economic growth is expected in China, India and Brazil.
With this data in mind, we can begin to get a better idea of the economic landscape and inflation next year, as well as global monetary and fiscal policies.
The big picture for next year is one of the normalization of global growth, or the gradual return of the economy to reality after a 3.2% collapse in 2020 due to the Covid crisis and a strong recovery of 5.9%, according to estimates by the International Monetary Fund; Next year, the IMF expects growth to start slowing to 4.9%.
But the difference is more apparent both in terms of characteristics of the economy and in terms of time. We will see a sharper economic slowdown in developed markets, particularly in the United States and Europe. This is the result of weakening pent-up demand, rising costs of production and living, and tightening monetary and fiscal policy. But the United States looks better than the others given its greater dependence on the service sector, which has seen a resurgence of late.
In Europe, the latest Covid outbreak is worrying, but we expect the situation to be under control as around 60-70% of people are vaccinated, reducing hospitalization and death rates. However, keep a close eye on Germany.
In emerging markets, particularly in Asia but excluding China, the economy in the first half of the year will be in a “sweet spot” as reopening after improving immunization rates has increased the chances of a recovery national. In addition, a good export trend will lead to increased incomes for people, while the money saved through fiscal and monetary measures will continue to boost domestic spending in the first half of the year.
In the second half of the year, the economies of emerging Asia excluding China will be driven by tourism which has started to recover. But domestic spending will start to slow. In addition, monetary and fiscal policies will begin to tighten. As a result, capital will start to flow back to developed countries.
SLOWDOWN IN CHINA
The trajectory of the Chinese economy will be different from others because it entered the Covid crisis and recovered before other countries. Today it faces three crises: energy shortages resulting from limiting the use of dirty fuels like coal; a real estate crisis and turmoil in other economic sectors, especially fintech, linked to the push for “common prosperity”; and continued pursuit of a zero Covid policy that affects consumption, investment and manufacturing.
While political austerity can ease in many areas, such as a resumption of coal use and more leeway for banks to lend to the real estate sector when they are cautious, we nonetheless believe that the China’s economic momentum continues to slow. Additionally, supply chain issues such as shortages of raw materials, coupled with Covid restrictions, will cause the economy to continue slowing from the fourth quarter of this year to the first quarter of next year.
After that, producer price inflation will start to slow down due to the gradual increases in production; more global vaccinations reduce the chances of a Chinese epidemic; and warmer temperatures will decrease energy demand. The problem of rising costs in the manufacturing sector will also ease. This should lead to a gradual recovery in the second half of the year. But next year’s overall GDP growth, at around 5% or less, will be lower than the roughly 8% forecast for this year.
However, even if the global economy will return to “normal” next year, the risks we highlighted in a previous column (such as a China slowdown, an emerging market crisis, and global stagflation ) persist and are ready to make the economy worse at any time. time.
The global economy has returned to normal, but the level of risk remains high. Investors, be more careful in this year of the Tiger.