James Pomeroy, Global Economist at HSBC, is speaking at the Private Markets Investor | Europe 2022 conference in March. To register and attend, click here.
James Pomeroy: 2022 may be best remembered as a year of higher interest rates. With the US Federal Reserve expected to start raising rates in March, many of the world’s other central banks look set to tighten monetary policy in the course of the year.
Some already have started, including the UK, Norway, New Zealand, and much of the emerging world, particularly in CEEMEA and Latin America. The big question for investors is what higher rates do to the economic recovery and to investor sentiment.
“2022 may be best remembered as a year of higher interest rates.”
Tightening is being prompted by much higher inflation in almost all of the world (with parts of Asia the clear exception) driven by a combination of supply side shocks, shipping challenges, labour shortages and higher energy prices.
How quickly and by how much these issues alleviate will determine the path for inflation and interest rates through 2022 and set the scene for the pace of the economic recovery.
James: Uncertainty is high. Firstly, it seems likely that the pace of growth will slow – we don’t have the same catalysts in 2022 as we had in 2021.
Both fiscal and monetary policy have become much less supportive and we’ve already seen most of the boost from the re-opening of the global economy as vaccines have spread across the world.
The downside risks are clear to see – mostly surrounding the pandemic itself, but also the risk that some of the spillovers of the past two years come through via business bankruptcies or lower investment from firms.
“It seems likely that the pace of growth will slow.”
But it’s important to remember the upside risks, too. In 2021, growth surprised on the upside in most of the world.
We have very healthy household balance sheets and tight labour markets. This should support the consumer recovery through the year, and we may see more border restrictions ease, benefitting sectors like tourism that have had an awful couple of years.
Investment in technology may also act as an upside risk, particularly if supply chain bottlenecks ease a bit, as they appear to be doing.
James: The key is to think about the broader topics that have been accelerated by the pandemic.
Environmental and social issues have leapt right to the top of the agenda. So more investment by firms in this space is likely as they seek to showcase their own ESG credentials, supported by targeted fiscal policy from governments who have made climate pledges.
Green investment is clearly an area that’s going to keep growing.
Also, the economy is going to keep getting more digitised. We expect more and more investment in automation by firms, but also a continued shift online from consumers – we think that by 2030 it’s not unreasonable to assume that 50% of retail sales will be online in the developed world.
“The key is to think about the broader topics that have been
accelerated by the pandemic.”
Digital payments will continue to boom as a result of this shift, too. These areas, we think, are likely to see outsized growth compared to the broader economy.
Equally, if the pandemic does ease in 2022, the leisure and tourism part of the global economy could have an excellent year or two as there is plenty of unmet demand for these services, and we could see a lot of spending if borders open up and consumers feel comfortable crossing them.
James: The main role is funding any shortfalls in investment.
I think there’s a huge role to play in terms of green financing – we know that almost every national government, local authority and company in the world is looking to spend more on greening up their operations. That funding has to come from somewhere.
We’ve also seen a jump in entrepreneurship during the pandemic and many of these start-ups will need the funding to help them scale in the coming years.
