Economic outlook 2022: could stagflation reduce the roaring 20s to a whimper?

When inflation crosses the red line in the chart above, it’s often associated with a memorable event such as the energy crisis in the 1970s. Could Covid-19 be the catalyst for unusually high inflation in 2022?

If inflation continues while growth slows and wages stagnate, we may enter a period of stagflation or recession-inflation not seen since the time of the 1970s energy crisis. If central banks intervene on inflation by reducing economic stimulus and perhaps increasing interest rates, this would increase the cost of capital and dampen growth. (The ECB, the Fed and the Bank of Japan are already showing signs of cutting back on Covid-19-era spending.) Similarly, rising interest rates could pose a threat to governments that have accumulated unprecedented Covid-era debts. There’s no quick fix for a stagflation-like scenario.

US economic outlook 2022: not yet the ‘normal’ year many hope for

We expect to see 6.3% growth for the US this year while its economy recovers from Covid-19 – the growth rate in 2020 was 3.4%. Still, growth looks set to slow in 2022 to 4%.

In the US, consumption is roughly 70% of GDP. The US economy is driven by consumption of goods and services, with services making up nearly two-thirds of total consumption. The consumption of services fell during Covid-19 because of lockdowns and other restrictions. It has yet to recover to 2019 levels. Slow recovery in the service sector is dampening growth and represents a downside risk to the US economy.

We also looked at the US labor market, which has a bearing on consumption levels. In Q3 2021, there are around 5.3 million open jobs – a classic good news/bad news metric. While open jobs are a positive indicator of economic growth, high levels of unemployment could constrain spending. We’ll be watching to see how quickly those open roles are filled – a mismatch between employer requirements and the skills of the workforce is a downside risk that can take several years to resolve.

Manufacturing recovers but not yet ‘back to normal’
The US purchasing manager’s index (PMI), a measure of the health of the manufacturing industry, and industrial production levels have both recovered well from vertiginous falls in 2020. But production levels have not yet returned to 2019 levels.

Housing stock shortage looms
The housing market came roaring back in late summer 2020 after a brief period of stagnation when Covid-19 lockdowns were at their peak. If you’ve been following the volatile lumber market in 2021, you’ll be familiar with the way in which the housing market has driven growth this year.

In 2022, supply of housing stock rather than demand is the area of concern. Low housing stock levels threaten to push home prices higher, which will slow home sales, in turn shrinking demand for housing-related products and services. 

Europe economic outlook 2022: recovery loses steam
Europe’s economy continues to struggle. We forecast growth of just 3.1% through to the end of 2021. In 2022, we expect to see a growth rate closer to 4.8%, lagging behind the US. 

In the euro area, 2.3% of jobs are vacant. It has only reached that height once before – in 2019 – in the past eight years. Just like the US, the degree to which skills in the workforce match the skills in demand will determine how long high rates of underemployment persist

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