It’s time to dust off the crystal ball and think about economic prospects for 2022. Before I do so, however, it’s worth considering what economists got wrong this year. For the UK and, for that matter, much of the developed world, there were two big errors.
First — and entirely good news — the economic rebound from the initial lockdowns was considerably bigger than expected. At the tail end of 2020, economists were understandably cautious. Margaret Keenan, the first UK citizen to be vaccinated, received her initial dose in December 2020. No one knew for sure how quickly thereafter populations would be vaccinated. As it turned out, successful vaccination programmes allowed economies to be unlocked sooner, and to perhaps a greater degree, than economists had bargained for.
The “great rebound” was also helped by lavish increases in public borrowing as finance ministries constructed bridges allowing both businesses and workers to make the difficult journey from a pre-pandemic past to a post-pandemic future. These bridges worked. In other circumstances, lockdowns might have led to multiple bankruptcies and mass unemployment. Finance ministers deserve considerable credit for ditching fiscal orthodoxy at precisely the right moment.
There was, however, a second big error. Most economists complacently assumed that central bankers would either hit their inflation targets or, at worst, experience a modest undershoot. As it turned out, inflation rose further than anyone had imagined. As I write, US inflation stands at 6.8 per cent,UK inflation at 5.1 per cent and the eurozone equivalent at 4.9 per cent. It’s why, all of a sudden, everyone is talking about higher interest rates.
Earlier in the year, central bankers tried to argue that higher inflation was “transitory”, a mere bump in the road to economic recovery. That’s no longer a tenable view. Prices are rising, labour markets are tightening and supply chains are fragmenting. The economic “costs” of Covid, it seems, have shown up in a rather unexpected place.
So what about the year ahead? Well, the biggest single difficulty remains the pandemic. We don’t yet know how dangerous Omicron will prove to be but we do know it is both incredibly infectious and remarkably capable of infecting those who have already been twice or thrice vaccinated. Two of my daughters (both double jabbed) currently have it — mildly, it seems — and their experience is nothing unusual.
Whether or not the UK locks down again, it’s likely that international restrictions will intensify — not helpful for the restoration of functioning global supply chains — including, importantly, the smooth flow of workers across borders. As such, the difficulties witnessed in the second half of this year — labour shortages, higher prices, delayed investments, unfulfilled orders — may continue to blight the economic landscape in the first few months of next year. Interest rates will have to rise further. Inflationary pressures aren’t likely to ease any time soon, even if economic growth remains lacklustre.
Indeed, it could be argued that policymakers made a big mistake last year, prematurely concluding that the pandemic represented, economically, a temporary demand shock and not, as it now seems, a rather more permanent supply shock.
We have now realised — reluctantly, perhaps — that Covid can mutate to a considerable degree, so much so that vaccination programmes are in constant danger of playing catch-up. As such, we’ll be facing longer-term economic risks in 2022 that rarely merit much discussion.
Most obviously, can governments continuously afford to fund furlough schemes if, as a consequence, government debt rises indefinitely? Secondly, although levels of economic activity have, in some cases, returned to pre-Covid levels, can businesses really invest for the long term when the long term may end up being no more than the unpredictable sum of a series of incredibly uncertain short terms?
And, thirdly, even if individual nations appear to be over the worst, how can there be lasting guarantees of success if, in the absence of a successful global vaccination programme, mutations are imported from abroad? All of which is a roundabout way of saying that I wish you a merry Christmas and a happy, prosperous and more certain new year.
Stephen King is HSBC’s senior economic adviser and author of Grave New World
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