Recovery from Covid-induced recession continues more slowly Recovery from Covid-induced recession continues more slowly\images\insights\article\hourglass-book-on-table-small.jpg January 12 2022 January 12 2022

Recovery from Covid-induced recession continues more slowly

Three things to watch in 2022.

Published January 12 2022
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Economic recovery and the evolution of the virus Recovery from the Covid-induced recession will continue, albeit at a slower and possibly less volatile pace. The slowdown will reflect a normalization in growth rates as the initial impact of reopening economies and the sugar rush of fiscal and monetary stimulus start to fade. Demand should stabilize, as generous cash buffers allow households and corporations to withstand the impact of expiring emergency-related fiscal measures. At the same time, supply constraints should gradually ease, as the pandemic heads towards endemic equilibrium.

Inflation and monetary policy Inflation should start a gradual descent in the spring as Covid-related supply/demand imbalances start to ease. A moderating picture for inflation and more clarity about labor markets trends (likely showing lingering slack) should allow central banks in advanced economies to maintain accommodative financing conditions with an only gradual withdrawal of monetary stimulus and still-large central bank balance sheets. Alternative and less benign tightening scenarios are possible if some Covid-induced changes become more permanent and structural, resulting in stickier inflation.

An ongoing structural transition of the Chinese economy that’s rife with risks An early withdrawal of fiscal and monetary policy stimulus and a zero-tolerance Covid policy were drags on growth throughout 2021, but regulatory policies and a crackdown on the property sector were big hammers in the second half of the year, too. These changes come as China continues its secular evolution from an export-based, investment-intensive growth model to a more mature model that relies on domestic demand. This growth slowdown is partially deliberate as the focus is now about the quality and sustainability of growth (re: “common prosperity”) rather than on the quantity. Policymakers will likely try to make the process as smooth as possible going into China’s 20th National Party Congress in the fall.

Tags Markets/Economy . 2022 Outlook .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Hermes Investment Management Limited.