In 2022, the supply side will still be the main aspect of the contradiction, and its impact on downstream production and terminal consumption will gradually appear.
Say said that supply creates demand (“Say’s Law”). Conversely, insufficient supply will wipe out demand. Global value chain trade used to continuously deliver cheap manufactured products to developed countries, but the new crown pneumonia epidemic disrupted the division of labor in the value chain, causing the prices of raw materials and durable goods to continue to rise, and inflation is returning. In 2022, the supply side will still be the main aspect of the contradiction, and its impact on downstream production and terminal consumption will gradually appear. The macroeconomic operation is specifically manifested in the following four difficulties:
First, it is difficult to bridge the output gap. As of the fourth quarter of 2021, only China and the United States among the major economies have returned to the path of potential output growth. The coexistence of output contraction and price increase shows that negative supply-side shocks have dominated the economic operation after the epidemic. Whether and to what extent this structural contradiction can be alleviated in 2022 will depend on the relative movement of supply and demand.
There is a certain consensus that: (1) The supply-side constraint is longer than expected. In the context of climate warming and energy transition, the supply of traditional petrochemical energy may be a long-term constraint, which has different meanings for resource-producing countries and demanding countries; ( 2) The “exogenous demand” from government departments has entered the exit cycle, while the “endogenous demand” from enterprises and residential departments is still affected by the epidemic and shows weak characteristics. Both will help alleviate the pressure of price increases in the direction, but the gap will be slower to converge.
Second, it is difficult to improve the supply chain situation. Countries play different roles in the global supply chain trade network. Due to complex reasons such as the epidemic, vaccines, and anti-epidemic policies, it is almost impossible for the global supply chain to recover at the same time-the only possible situation is the unexpected disappearance of the new crown virus, similar to Japanese case. As of October 2021, the “supply chain disturbance” index in the United States and the Eurozone is still at a high level, and the congestion situation in US ports has not improved. Looking forward to 2022, the situation in which manufacturing production is restricted by value chain trade may hardly change substantially.
Third, inflationary pressures that are hard to ignore. In the short term, global inflationary pressures in 2022 will be lower than in 2021. However, energy supply shortages, low commodity inventories, rising wage levels, service demand recovery and capital expenditure expansion are still four important factors that support prices. In terms of different countries, the fourth quarter of 2021 is likely to be the top of US inflation. The inflation rate for the whole year of 2022 is likely to return to less than 3%, but the growth rate in the first half of the year may still remain above 3%. The pressure of rising prices in the United Kingdom and the European Union will continue into the first half of 2022, especially in the United Kingdom and Germany.
In the medium and long term, using the “secularstagnation” before the epidemic as the conceptual framework, the aging trend will continue, and the epidemic has led to an increase in the number of early retirements and a decline in labor participation rates, thereby exacerbating labor shortages; also The pressure of “expansion” has been added-the regionalization trend and localization of the global supply chain will reduce the efficiency of resource allocation; in the context of climate warming and carbon neutrality, the supply constraints of raw materials and energy are not short-term issues.
Fourth, unsustainable loose policies. Structural stagflation is a blind spot for monetary policy, and 2022 will be the year when the currency ebbs. The Fed has reduced its asset purchases (Taper) in November 2021. The uncertainty lies in when and how often it will raise interest rates. What is certain is that compared with the exit cycle of 2013-2019, the pace of normalization of unconventional policies will be faster this time, and the time interval from the end of Taper to the interest rate hike will be shorter. There may also be a difference in the order of interest rate hikes and balance sheet reductions, because the former will flatten the yield curve and reduce the length of the recovery cycle, while the latter can expand the room for interest rate hikes. The market has regarded Powell’s re-election as Fed chairman as a signal that Fed policy may be hawkish next year. The trend of inflation has a decisive impact. If the inflation rate falls below expectations, the Fed can exit step by step. After the Taper is over, observe for a period of time before raising interest rates, and then shrink the balance sheet, otherwise the time point for both the rate hike and the balance sheet reduction may be earlier. The sequence may also be reset.
Also because of inflationary pressures, the Bank of England’s withdrawal from unconventional policies is already on the line, and it may even precede the Fed’s rate hike. The European Central Bank still maintains its decision not to raise interest rates in 2022. To combat inflation and ease capital outflows, Brazil and other emerging market economies have begun to tighten monetary policies. Since 2020, the GDP-weighted average policy interest rate of emerging market economies has risen by nearly 100 basis points.
