Founder and Executive Chairman of the World Economic Forum (WEF) Klaus Schwab is seen at the opening of the WEF Davos Agenda virtual sessions at the WEF's headquarters in Cologny near Geneva on January 17, 2022. - Chinese President Xi Jinping warned that confrontation between major powers could have "catastrophic consequences" in a speech to world leaders at an all-virtual Davos forum. (Photo by Fabrice COFFRINI / AFP) (Photo by FABRICE COFFRINI/AFP via Getty Images)
This year stands to be characterised by uneven global recovery from Covid-19’s economic onslaught, vaccine inequality, high levels of inflation and unemployment,and an even wider gap between the rich and poor. All of this will happen as central banks start to pull back accommodative monetary policy to respond to the side effects of recovery.
These issues were front of mind as heads of state, central bank and business leaders gathered virtually last week for the World Economic Forum’s Davos Agenda to share their views on what is in store for the global economy in 2022.
This week, the major economic focus this week will be on central bank monetary policy meetings, both in South Africa and the US. Both countries have recently posted inflation data showing that high prices will likely remain a stubborn feature of global economic recovery.
Kristalina Georgieva, the managing director of the International Monetary Fund (IMF), said last week that the response to the pandemic-induced crisis so far “has been anything but orthodox”.
“It was diagnosed correctly at the beginning of the pandemic … And in a highly co-ordinated manner, both central banks and finance authorities have responded in a way that prevented the world from falling into yet another great depression,” Georgieva said.
Georgieva added that policymakers should make policy flexibility their new year’s resolution. “Because 2022 is like navigating an obstacle course.”
The good news is that recovery will continue in 2022, Georgieva said. “But it is losing some momentum and it is faced with the renewal of infections. On top of that there is much more persistent than expected inflation. And on top of that, is the record-high debt levels.”
Stubbornly high inflation, Georgieva said, “is not just for central bankers to fight”. High inflation, she noted, is the result of supply-chain disruptions — worsened by surging demand by recovering economies — climate-related food price hikes, high energy prices and changes to the labour market.
“When you disaggregate the reasons for inflation, then you understand that it is for central banks to be evidence and data driven — to communicate clearly. But other segments of policymaking also have to be in place,” she said.
She added that national responses to the pandemic, like low vaccination rates, stand to create “a very dangerous divergence” in the world economy, thus worsening supply-chain disruptions and inflation.
‘Difficult year’ ahead
The complicated set of problems arising from the pandemic and the world’s recovery from it may make 2022 a far more difficult year than 2020, Georgieva said. This is because, at the start of the pandemic, countries were fighting a single enemy. “In 2022, conditions in countries are very different. So we can no longer have the same policies everywhere. It has to be country specific. And that makes our job 2022 so much more complicated.”
The actions of the US Federal Reserve (the Fed) in 2022, starting with this week’s monetary policy decision, have far-reaching consequences, Georgieva noted. If the Fed does hike interest rates, it could throw cold water on the recovery of countries with high dollar-denominated debt, she added.
Federal open market committee minutes, released earlier this month, were more hawkish on inflation stateside. The minutes indicated that, with inflationary pressures having broadened in the latter months of 2021, faster monetary policy tightening and a reduction of the Fed’s balance sheet may be on the cards.
“Participants generally noted that, given their individual outlooks for the economy, the labour market and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,” the minutes read.
Georgieva urged countries with high levels of dollar-denominated debt to “act now” by extending maturities and addressing currency mismatches.
Christine Legarde, the president of the European Central Bank (ECB), defended the central bank’s dovish stance on dialling back accommodative monetary policy. “If there is one thing that all economies have learned in the course of this crisis, it is a lesson of humility,” she said.
“Because whoever you look at, whether it is the ECB, whether it is the IMF, whether it is the OECD [Organisation for Economic Co-operation and Development] … we all massively underestimated the recovery, the employment participation, as well as inflation.”
Legarde noted that it is important for policymakers to consider what is driving inflation and how long elevated prices will last. The ECB is assuming that energy prices and supply bottlenecks will stabilise in 2022 “and gradually those inflation numbers will decline”, she added.