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Outlook 2022

1/26/2022

TRANSCRIPT // Outlook 2022 : January 2022

William De Vijlder: Amongst the economic developments in 2021, three have been particularly important and influence the outlook for 2022. One, the resilience of economic activity to the successive infection waves has increased. Two, heterogeneity is a key characteristic of the economic consequences of the pandemic, with significant differences between advanced and developing economies. Three, inflation has made a spectacular comeback, to a large degree due to the energy price shock and supply disruption, causing an intense debate on its transitory or lasting nature and what this entails for monetary policy.

 

OECD

Hélène Baudchon, Eurozone: In the eurozone, in 2022, the ECB’s monetary policy will remain in the spotlight given the upside risks to inflation. But the major debate, in our view, will be that on the reform of the fiscal rules in Europe. The aim is to define a new framework that is better respected and less complex. As we know, consensus will be difficult to find. Indeed, it will be necessary to reconcile credibility, flexibility and fiscal discipline, debt reduction and support to green and inclusive growth. Stakes are high and the challenge will be to avoid an anticlimax.

 

Stéphane Colliac, France: In France, this year, households’ purchasing power is the main topic, as inflation has significantly accelerated and should remain quite high during the first semester. As a result, this issue is one of the main topics of the Presidential election, with two questions: the first on the pace of wage growth, and the second on household consumption dynamics. Of course, this election should also be the occasion to renew with the reform agenda. The pension reform was interrupted two years ago and should resume.

 

Guillaume Derrien, Southern Europe: For Southern EU countries, apart from the challenge of cementing the economic recovery, we will be monitoring two key developments: first, a political one, with legislative elections in Portugal and the presidential elections in Italy, both scheduled at the end of January. Although this is not the most likely outcome, these elections could lead to a weakening of the coalitions in place, with possible repercussions on the progress of structural reforms, reforms which are demanded by the European Commission under the framework of the EU recovery funds. We will also keep an eye on the bond market, and a possible rise in sovereign interest rates linked to high inflation and the start of the ECB's monetary policy normalization.

 

Hélène Baudchon, Climate change : On the climate front, in 2022, we will be closely monitoring the following two advances in Europe: 1/ the European Commission’s definition of a green taxonomy (including gas and nuclear), which should be completed at the beginning of the year; and 2/ discussions on the adoption of a carbon tax border adjustment mechanism, which should be completed in the coming months. More globally, we will also have to pay close attention to the strengthening of the commitments of the parties expected at the COP27 to be held in Egypt in November. Indeed, this reinforcement is essential to safeguard the objective of limiting global warming to 1.5°C.

 

 

Emerging countries

François Faure, Emerging countries: As for emerging countries, the balance between outlook/risk balance has deteriorated at end-2021 with the slowdown in China and the crisis in the real estate sector, shortages in industrial sectors, a general acceleration of inflation beyond the effect of commodity prices, tightening of monetary policies and geopolitical tensions. For 2022, risks are a larger-than-expected slowdown in growth at best, social instability at worse.

 

Christine Peltier, China: In China, the authorities have started to ease monetary and fiscal policy in response to the pronounced growth slowdown in the second half of 2021. Domestic demand growth should strengthen in the very short term, but the property market correction should continue. Meanwhile, export performance should remain robust.

In 2022, the challenge for the authorities will be to better coordinate policy measures, regulatory tightening in some services sectors and efforts to improve financial practices. The objective is to continue to adjust the Chinese growth model to make it more ‘sustainable’ and to build a more ‘egalitarian’ society while at the same time containing downside risks on economic growth.

 

Pascal Devaux, Egypt & the Gulf region: In Egypt, the liquidity in foreign currencies could be at risk. In 2022, we expect a rise in the current account deficit and higher spread on external debt.

In the Gulf region, sustained oil prices will test the governments’ willingness to continue fiscal consolidation. It is a key element for economic diversification.

 

Salim Hammad, Brazil: In 2022, the economic environment in Brazil will combine very mild growth prospects and persisting inflation. Monetary authorities will have to compose with the anticipated tightening of monetary policy in the US and lingering market concerns regarding the fiscal trajectory – two phenomena that are likely to weaken the currency and therefore have a negative impact on inflation and growth dynamics. On the political front, the point of attention will obviously be the general elections in October – an election that will no doubt be very divisive and could be marked by judicial proceedings; the election will however provide another opportunity to test the resilience of Brazilian institutions. The electoral cycle is expected to put a break on the advancement of reforms; it will also slow down investment and accentuate market volatility.

 

François Faure, Turkey & Russia: In Europe, Turkey will remain the main unknown. Monetary and foreign exchange policies, which bet on growth through exports at the expense of financial instability, may lead the country to stagflation and undermine the solvency of corporates indebted in foreign currency.

Russia will be the other focus due to geopolitical tensions with the threat of additional sanctions. The growth potential of the Russian economy has already been constrained by low private investment. Moreover, high inflation could lead the government to favor social spending over development spending.

 

Christine Peltier, India: In India, a number of Assembly elections will be held in the coming months. Uttar Pradesh, which is the most populated State, should be at the centre of the political battle.

The implementation of some key reforms that were adopted in 2020 should continue this year. This is unless the government backtracks as it already did on agricultural reform.

We’ll be watching inflation. Its acceleration could constrain domestic demand growth and lead the authorities to tighten monetary conditions while support measures for the most fragile households and enterprises come to an end. Finally, we will monitor closely the performance of public finance, which remains a crucial issue in India.

 

William De Vijlder: Key takeaways from our 2022 outlook are the key role played by supply disruption, which is expected to ease gradually, and how it influences the inflation outlook and wage growth. This in turn will steer decisions taken by central banks, where the tone has already been set by the Federal Reserve, which is expected to hike its policy rates on several occasions this year. As a consequence, based on past experience, it is to be expected that financial market volatility would rise. This will be monitored closely in emerging economies given the possible influence on capital flows.

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