Global economy 2022: the year of normalisation

Global economy 2022: the year of normalisation

As we head into the final stretch of the year, our eyes are on next year's economic and investment landscape. If we compare current conditions with those of this time last year, we will see a clearly different picture.

At the end of last year, investors were expecting a rosy picture coming into the New Year. The results of the US presidential election, with a calm and prudent Joe Biden to replace a combative Donald Trump, as well as the news of successful vaccine development to prevent Covid-19, had raised investors' hopes.

The investment climate was excellent in the first half of the year, partly because of the massive stimulus, both monetary and fiscal, from central banks and governments to combat the effects of the pandemic. Some called the situation "too good to be true".

Moving into the second half, the picture began to change. In China, the communist government announced a "common prosperity" policy to promote equality, which in essence involves tightening control of businesses that authorities consider risky, such as fintech, tutoring schools, online games, the real estate sector, mining, and others.

This policy move by Beijing has led to greater risks to the economy and investment, magnified by the problems facing China's second largest real estate business, China Evergrande. The risks are compounded by the "zero-Covid" policy, in which the government stands ready to lock down millions of citizens whenever an outbreak starts, and the energy crisis that has emerged in the second half of the year.

In developed-market economies, we are starting to see greater risks, both from high inflation that has dragged on for longer than many pundits and central bankers first expected, and the renewed fear of another round of Covid contagion, especially in Europe. The news emerging from South Africa late last week of a worrisome virus variant is sure to fray nerves further.

Furthermore, tightening of fiscal and monetary policy is starting in several countries. We have seen interest-rate increases in New Zealand and South Korea, and reduction of monetary stimulus (quantitative easing) in Canada, Australia and the UK. But with lots of liquidity flowing around currently, investment in risky assets still gives a good return.


The question is, what will the world economic and investment picture look like next year? The simplest answer might be found in the OECD Leading Economic Indicators, which pulls together a large amount of data to forecast activity over the next 6-9 months. It indicates signs of peak growth coming in the United States, Japan, Germany and the United Kingdom, and growth beginning to slow in Canada and Italy. In emerging markets, slower economic growth is foreseen in China, India and Brazil.

With that data in mind, we can start to form a clearer picture of the economic and inflation landscape next year, along with global monetary and fiscal policies.

The big picture next year is one of global growth normalisation, or the gradual return of the economy to reality after a 3.2% slump in 2020 because of the Covid crisis and a sharp recovery of 5.9%, according to International Monetary Fund estimates; next year, the IMF expects growth will begin to slow down 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 clearer economic slowdown in developed markets, especially the United States and Europe. This is a result of fading pent-up demand, rising production and living costs, and tightening monetary and fiscal policy. But the US looks better than the others given its larger dependence on the service sector, which is reviving lately.

In Europe, the latest Covid outbreak is worrisome, but we expect that the situation will be under control since about 60-70% of the people are vaccinated, which reduces hospitalisation and fatality rates. However, keep a close eye on Germany.

In emerging markets, especially in Asia but excluding China, the economy in the first half of the year will be in a "sweet spot", because reopening after vaccination rates improved has increased the chance of a domestic revival. In addition, a good export trend will lead to more income for people, while money saved from fiscal and monetary measures will continue to give a boost to domestic spending in the first half.

In the second half, the economies of Emerging Asia excluding China will be driven by tourism that has begun to revive. But domestic spending will begin to slow down. In addition, monetary and fiscal policy will begin to tighten. As a result, capital will begin to flow back to developed countries again.


The trajectory of China's economy will differ from others as it entered the Covid crisis and recovered before other countries. At present, it is facing three crises: energy shortages resulting from curbs on the use of dirty fuels such as coal; a real estate crisis and trouble in other economic sectors, especially fintech, related to the push for "common prosperity"; and continued pursuit of a zero-Covid policy that affects consumption, investment and manufacturing.

Although policy austerity may be easing in many areas, such as a pickup in the use of coal and more leeway for banks to lend to the real estate business when prudent, nevertheless we believe China's economic momentum is still slowing. As well, supply chain problems such as raw material shortages, coupled with Covid restrictions, will cause the economy to slow continuously from the fourth quarter of this year into the first quarter of next year.

After that, producer price inflation will begin to slow down due to gradual increases in production; more global vaccinations reduce the chances of a Chinese outbreak; and warmer temperatures will cause energy demand to decline. The problem of rising costs in the manufacturing sector will also ease. That should lead to a gradual recovery in the second half of the year. But next year's overall GDP growth, at around 5% or lower, will be lower than the 8% or so forecast for this year.

However, even though the global economy will return to "normal" next year, the risks we highlighted in a previous column (such as a China slowdown, emerging market crisis and global stagflation) remain and are ready to cause the economy to worsen at any time.

The global economy has returned to normal, but the risk level is still high. Investors, please be more careful in the Year of the Tiger.

Piyasak Manason is senior vice-president and head of the wealth research department at SCB Securities, email

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