Although the major economies and markets did well in 2021 despite all the uncertainties surrounding the new variants of the coronavirus, 2022 will bring new challenges. In addition to the shift by central banks towards policy normalization, geopolitical and systemic risks are multiplying.
NEW YORK – Despite the drops and disruptions generated by the new variants of Covid-19, 2021 turned out to be a relatively positive year for economies and markets in much of the world. Growth surged above its potential after the harsh 2020 recession and financial markets recovered robustly. This is especially the case in the United States, where stock markets reached new peaks, due in part to the ultra-lax monetary policy of the United States Federal Reserve (although central banks in other advanced economies implemented their own radically accommodative policies). .
But 2022 may be more difficult. The pandemic did not end. Ómicron may not be as virulent as previous variants – particularly in advanced economies with high levels of vaccination – but it is much more contagious, implying that hospitalizations and deaths will remain high. The resulting uncertainty and risk aversion will stifle demand and exacerbate supply chain bottlenecks.
Coupled with excess savings, stifled demand, and lax monetary and fiscal policies, those bottlenecks fueled inflation in 2021. Many of the central bankers who insisted the rise in inflation was transitory have now admitted that it will persist. With varying degrees of urgency, they are planning to phase out unconventional monetary policies such as quantitative easing, so that they can begin to normalize interest rates.
Central banks’ resolve will be tested if the hikes in monetary policy rates lead to shocks in the bond, credit and equity markets. With this huge accumulation of private and public debt, markets may not be able to digest higher borrowing costs. If a crisis occurs, central banks will find themselves in a debt trap and likely to reverse course. That would make it possible for inflation expectations to rise and inflation to become endemic.
The year ahead also brings with it growing geopolitical and systemic risks. On the geopolitical front, there are three major threats to be aware of.
First, Russia is preparing to invade Ukraine and it remains to be seen whether negotiations on a new regional security regime will be able to prevent an escalation of the threat. While US President Joe Biden has promised more military aid for Ukraine and threatened tougher sanctions against Russia, he has also made it clear that the United States will not intervene directly to defend Ukraine from attack. But the Russian economy has become more resilient to sanctions than in the past, so these threats may not deter Russian President Vladimir Putin. After all, some Western sanctions – such as a measure to block the Nord Stream 2 pipeline – could even exacerbate Europe’s own energy shortages.
Second, the Sino-American cold war is getting colder. China is increasing its military pressure on Taiwan and in the South China Sea (where many territorial disputes are brewing), and the further decoupling between the Chinese and North American economies is accelerating. This development will have stagflationary consequences over time.
Third, Iran is now a threshold nuclear state. It has been enriching uranium at a rapid pace to practically nuclear weapons grade, and negotiations for a new nuclear deal or a renewed deal have gone nowhere. As a result, Israel is openly considering attacks on Iranian nuclear facilities. If this happened, the stagflationary consequences would likely be worse than the oil-related geopolitical crises of 1973 and 1979.
The new year also brings with it several systemic issues. In 2021, heat waves, fires, droughts, hurricanes, floods, typhoons, and other disasters exposed the real-world implications of climate change. The COP26 climate summit in Glasgow essentially involved empty words, leaving the world on track to suffer a devastating 3 ° Celsius warming this century. Droughts are already driving dangerous spikes in food prices, and the effects of climate change will continue to worsen.
To add insult to injury, the big push to decarbonize the economy is leading to underinvestment in fossil fuel capacity before there is a sufficient supply of renewable energy. This dynamic will lead to much higher energy prices over time. Likewise, climate refugee flows to the United States, Europe and other advanced economies will increase as those countries close their borders.
In this context, political dysfunction is growing in both advanced economies and emerging markets. Midterm elections in the United States may offer a preview of the full-fledged constitutional crisis – if not outright political violence – that could ensue after the presidential vote in 2024. The United States is experiencing almost unprecedented levels of party polarization, stagnation and radicalization, which pose a serious systemic risk.
Populist parties – both far-right and far-left – are consolidating around the world, including in regions like Latin America, where populism has a disastrous record. Peru and Chile elected radical leftist leaders in 2021, Brazil and Colombia may follow in their footsteps in 2022, and Argentina and Venezuela will continue their course towards financial ruin. The normalization of interest rates by the Fed and other major central banks could spark financial crises in these and other fragile emerging markets like Turkey and Lebanon, not to mention the many developing countries with debt ratios that are already unsustainable.
As 2021 drew to a close, financial markets remained fizzy, if not downright bubbly. Public capital and private capital are expensive (with above-average price-earnings ratios); Real estate prices (both housing and rent) are high in the United States and many other economies, and there is still a craze around meme stocks, crypto assets, and SPACs (special purpose acquisition companies). Government bond yields remain ultra-low, and credit spreads – both high-yield and high-grade – have narrowed, due in part to direct and indirect support from central banks.
As long as central banks were in unconventional policy mode, the party could go on. But asset and credit bubbles may deflate in 2022 when policy normalization begins. Likewise, inflation, slower growth, and geopolitical and systemic risks could create the conditions for a market correction this year. Whatever happens, investors are likely to remain seated on the edge of their chair for much of 2022.
The author
Nouriel Roubini, emeritus professor of economics at New York University’s Stern School of Business, is chief economist for the Atlas Capital Team, CEO of Roubini Macro Associates, and co-founder of TheBoomBust.com. He is a former senior economist for international affairs on the White House Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the United States Federal Reserve, and the World Bank, and was a professor of economics at New York University’s Stern School of Business. His website is NourielRoubini.com, and he is the host of NourielToday.com.
Copyright: Project Syndicate, 2020
Reference-www.eleconomista.com.mx