Looking beyond the strong recovery in 2021, the Argentine economy remains fragile. Production in primary and secondary sectors has returned to its pre-pandemic levels. However, the economy remains constrained by high though largely repressed inflation, which is hitting household consumption and services. Since December 2021, a new wave of Covid-19 infections has introduced additional uncertainty. The mid-term elections have weakened the government coalition, which is still negotiating with the IMF. Monetary policy is tightening and the normalisation of budget deficit financing will require a slowdown in expenditures, although a drastic consolidation is unlikely. However, time is running out
Gabriel Boric won the second-round presidential election in December. He will take up his post in mid-March and will face many challenges during his term. The new government will have to deal with a fragmented legislative assembly and high levels of popular expectation. Economic growth is likely to slow as exceptional support measures are gradually withdrawn. Although vaccination levels are high, activity could be weakened by new waves of infection and the accompanying restrictions. Lastly, consolidating public finances whilst fulfilling promises to reform education, healthcare and pensions would seem to be the biggest difficulty.
After showing rather strong resilience to the pandemic and the collapse of international oil prices in 2020, the Russian economy rebounded strongly in 2021. Yet two major risks are currently threatening growth: inflation and a tightening of international sanctions. These sanctions could even add to the inflationary risk. Nonetheless, the government has the financial capacity to support the economy, with solid public finances and low refinancing risks. Moreover, even if international sanctions were tightened to the point that foreign investors were denied access to Russia’s secondary debt market, the government would still be able to finance itself on the domestic market.
The Ukrainian economy has suffered an accumulation of external and domestic shocks: the pandemic (vaccination rates are still low), the ongoing geopolitical risk, and domestic political tensions. Adding to these factors, inflation has accelerated over the past year. However, the Covid-19 crisis has been much better absorbed than was the case for the crises of 2008 and 2014. The current account balance has recovered and foreign currency reserves have increased, thanks in particular to higher commodity prices (cereals and metals). International support (mainly from the IMF and European Union) provided the required complement, allowing fiscal support to the economy. However, the country remains exposed to a sudden stop of capital flows
The Israeli economy goes into 2022 in a favourable position. After a strong recovery in 2021, growth is likely to receive continued support from household consumption and exports. Although inflation is rising, it remains under control, which should allow the continuation of an accommodative monetary policy. Macroeconomic fundamentals remain very favourable for the shekel, although monetary tightening in the US and a possible correction in US equity markets could slow its rise. The vulnerability of public finances to an increase in interest rates remains limited, due to the essentially domestic financing of the budget deficit and the low risk of any substantial monetary tightening in the short term.
In Ghana, the warning signs are multiplying. Although economic growth has been fairly resilient, public finances have deteriorated sharply at a time of surging inflation. This is unsettling investors and threatening economic prospects. The central bank has already reacted by raising its key policy rate. But the authorities must reassure that they are capable of reducing the fiscal deficit. For the moment, they have failed to do so. Yet severe financial constraints and a dangerously high debt burden could force them to make adjustments.
Economic recovery is likely to be strong in 2022, driven by buoyant household consumption and rising oil GDP. Labour market reforms are having a positive effect on domestic demand, most notably via a significant increase in women’s participation rates. Inflationary risk remains moderate, even though wage pressures have increased recently. With the increases in oil prices and output, there is likely to be a budget surplus this year. This is due in particular to progress in the diversification of fiscal revenue. The higher level of oil prices will be a test for the government’s willingness to continue the budget consolidation process
For the first time since May 2019, 10-year Bund yields have moved back in positive territory. Three factors explain this development. Firstly, the traditional international spillover effect of developments in the US Treasury market where following a more hawkish tone from the Federal Reserve, yields have been on a rising trend since early December 2021. Secondly, markets are pricing the end of PEPP and the tapering of net asset purchases by the ECB. Finally, there is the prospect that, at some point, the ECB will raise its policy rate. Bond markets in the US and Germany have become highly correlated since 2021. This is an important factor given the imminent start of a rate hike cycle in the US and its possible influence on Treasury yields and, by extension, yields in the euro area.
Last month, our analysis of uncertainty indicators showed, on the whole, a slight increase. Based on the latest readings, the same conclusion applies and several indicators have continued to move slowly higher.
2022 will be another tense year for international trade. Although some of the tensions are easing, visibility is still limited and supply-chain bottlenecks will probably continue for much of the year, affecting the outlook for growth and inflation.
Chinese economic growth slowed to 4% year-on-year in Q4 2021 from 4.9% in Q3. In the industrial sector, the situation improved slightly in Q4 after a summer that was badly disrupted by power cuts and supply-chain problems. Industrial growth accelerated from 3.1% y/y in September to 4.3% in December, driven by the still strong performance of exports (up 22.9% y/y in Q4). In the immediate future, however, manufacturing output and exports are likely to suffer from repercussions arising from the latest wave of the pandemic.
The French economy seems to be getting off to a relatively good start in 2022, despite the introduction of tighter restrictions as a result of the Omicron wave. Positive momentum in the fourth quarter of 2021 – likely to be confirmed by GDP figures due on 28 January – has continued overall in the manufacturing and construction industries.
The current business cycle is atypical and this influences the analytical approach, with a focus on the supply side and whether it will be able to meet the level of demand in the economy, rather than on the demand side. Supply side disruption has been a key issue but recent PMI data suggest that we may have seen the worst. In the euro area and the US, the percentage of companies that are confronted with rising input prices and are contemplating to increase their output prices has started to decline and delivery lags are shortening. The Federal Reserve of New York’s global supply chain pressures index seems to have peaked. However, anecdotal evidence suggests visibility remains very low
The global manufacturing PMI was stable in December and has hardly moved since the spring of 2021. However, this masks significant differences between countries. Focusing on the most recent data, the US and the euro area saw a slight decline. Data for France and Germany were essentially stable whereas Italy and the Netherlands recorded a decline. Italy continues to have the highest score of euro area countries. The Czech Republic and Poland saw a further increase. China is doing better than last month whereas India saw a rather considerable decline.
The Fed gets serious. Faced with an unprecedented increase in inflation (6.9% y/y in November, probably scarcely less in December) the Federal Reserve will tighten monetary policy more than previously expected.
The indicators currently available for the end of last year suggest that Germany recorded weak growth at best in Q4 2021: a GDP contraction cannot be ruled out. Industrial orders remained at a relatively strong level, but production continued to be held back significantly by supply problems for certain components.
Economic figures for November once again show the dynamic momentum of Chinese exports (+21.4% year-on-year in current dollars), which continues to drive production and investment in the manufacturing sector. Our barometer highlights a deteriorated industrial performance in September-November 2021 compared to the previous 3-month period. Yet the industrial situation has been picking up slowly since October, after major disruptions in September due to power outages and supply chain disruptions. Industrial production rose 3.8% y/y, compared to 3.5% in October.
The Japanese economy revived in the fourth quarter after the state of emergency related to the Covid-19 infections was lifted in all prefectures in October. In particular, sentiment in the services sector has clearly improved. The quarterly Tankan survey showed that actual business conditions in the non-manufacturing sector gained 7 points in December compared with three months earlier. Moreover, consumer confidence improved in October and November to levels seen before the outbreak of the pandemic, although remaining low relative to its long-term average. By contrast, the gains in the manufacturing sector were minimal, as activity continues to be affected by supply disruptions and rising production costs that are reducing profit margins
Instead of drastically restricting conditions of activity, the government only made a few adjustments to their policy for combatting the pandemic: the state of emergency was extended for three months to 31 March 2022. Despite the resurging pandemic, business prospects are still looking upbeat this winter. PMI indices are holding at high levels, especially for the manufacturing sector. In November, the manufacturing PMI rose 1.7 points to a new high of 62.8, supported by the improvement of the employment and new orders components. The services PMI also improved, up 3.5 points to 55.9. The composite PMI for the past three months has held steady compared to three previous three months, as shown in the Pulse below.
Despite a substantial increase in new Covid-19 infections since the start of November, the infection rate is currently below those in France or Germany. Meanwhile, concerns about the health situation have had little effect on business confidence so far: the PMI Composite index improved in November (up 1.9 points to 58.3) thanks to better prospects in services. The positive trend in this sector can also be seen in the European Commission survey, which reveals levels of optimism not seen for twenty years. This said, household confidence has fallen back, mainly due to fears of rising consumer prices.
After last year’s sudden, deep and a-typical recession, caused by the Covid-19 pandemic, this year has also been a-typical in several respects. Supply bottlenecks and supply disruption have been dominant themes throughout the year, acting as a headwind to growth, both directly but also indirectly, by causing a pick-up in inflation to levels not seen in decades. Under the assumption that the pandemic is gradually becoming less of an issue thanks to the vaccination levels, 2022 should see a normalisation in terms of growth, inflation and monetary policy.
After strong growth in Q2 and Q3, the business climate deteriorated due to supply problems, the increase in prices and the surge in Covid-19 infections. Output is likely to stagnate around the turn of the year. The new government will put the emphasis on social and environmental policies, while fully respecting the fiscal framework, important for Germany. Private consumption will be the major engine for growth in 2022.
Factors hampering growth in the short term are gaining strength (supply chain disruptions, surging inflation, and the resurgence in the Covid-19 pandemic), but the resilience of business sentiment through November as well as numerous targeted measures to support household purchasing power help allay fears. In Q4 2021, we are forecasting growth of 0.6%, although the risk is on the downside. In full-year 2021, growth is expected to average 6.7%. In 2022, it will remain a robust 4.2%, bolstered by the accommodative policy mix, the unblocking of excess savings, the catching-up of the services sector as well as strong investment and restocking needs.
After a modest expansion in Q1 2021, real GDP rose by more than 2.5% q/q in both Q2 and in Q3. This recovery was widespread. In Q3, net exports added 0.5 percentage point to GDP growth thanks to a stronger rise in exports than imports. Thanks to the easing of social restrictions, consumption has further increased, while favourable financing conditions and fiscal incentives have supported investment. During the summer, the recovery expanded to the services sector, which benefitted from higher tourist receipts. Manufacturing production has recovered entirely from the 2020 decline, ending up 2% higher than in Q4 2019. Labour market conditions are not as good as the recovery would suggest.
Despite a rather weak recovery in GDP, the Spanish economy has been much more resilient on the labour market front in 2021. Employment (November) and the participation rate (Q3) are at record levels. Inflation will be one of the biggest obstacles in 2022, the increase in production prices having accelerated markedly this autumn. Support for growth will remain a government priority in 2022. The country will benefit from a larger transfer of European funds that will help finance a record budget of EUR196 billion. The reduction in the government deficit will be again pushed into the background, the authorities mainly betting on economic growth to reduce the deficit-to-GDP ratio.
