21-12-2021 14:21

Our Chief Economist: ‘Many things surprised us this year’

From supply chain bottlenecks and long delivery times to labour shortages and inflation, 2021 brought its share of economic surprises. Many of the challenges will continue into 2022, says Nordea Group Chief Economist Helge Pedersen.

Nordea Group Chief Economist Helge Pedersen.

2021 exceeded expectations as the global economy came roaring back after the shock of the coronavirus pandemic. However, the year has also brought its share of challenges, which took many forecasters by surprise, including Nordea Group Chief Economist Helge Pedersen.

“We’ve been surprised by a number of things, not least the high global inflation prints we’ve seen recently,” says Pedersen.

A potent cocktail of ultra-loose economic policy and effective vaccine rollouts in developed countries helped propel the world economy’s rapid recovery from the great lockdown of 2020.

“The recovery was so strong that global growth reached its highest point in almost 50 years,” says Pedersen, noting that the world’s total production is now greater than before the pandemic hit.

However, the rapid recovery also created new imbalances that will persist into 2022.

Shipping logjams and high energy prices

One surprise has been the long delivery times in production lines, says Pedersen. He explains the development as follows: Governments’ generous compensation schemes in response to the pandemic have fuelled purchasing power and demand, which, due to pandemic lockdowns and restrictions, shifted from services to goods.

Many of those goods are produced in China and shipped to the US. However, the pandemic has hurt harbour capacity and manpower at US ports, leading to logjams and ships unable to dock and offload. Port shutdowns in China due to the country’s zero-Covid policy have compounded the problem. This mismatch between demand and container traffic has caused shipping and transportation costs to spike.

Against this backdrop, energy prices have also risen sharply, in part due to lack of supply of Russian natural gas into European stocks.

“Countries around the world are currently experiencing the longest delivery times and highest costs on energy, materials and goods in memory,” says Pedersen.

“There’s already a mounting wage pressure in many countries.”

The global inflation shock of 2021

High producer prices are to an extent being passed on to consumers, resulting in the big shock of 2021 – inflation. After being almost non-existent for decades, inflation has risen to the highest levels in the last 30 to 40 years in both the US and Europe.

At the start of 2021, Nordea’s forecast for US inflation was an average of 2.2%, compared to the reality of 4.5%. Nordea also expected inflation to hover around 1% in the Euro area, and it ended up around 2.5%.

Another big surprise in 2021 has been the tight labour market situation in many parts of the world, with a record number of employers reporting difficulties hiring qualified workers. The pandemic continues to hamper labour supply and mobility, which will likely lead to higher wages.

“There’s already a mounting wage pressure in many countries,” says Pedersen, noting that higher wages could be passed on to consumers, triggering a wage-price spiral and higher inflation in 2022.

Higher interest rates on the horizon

The inflation picture is a situation central banks around the world are taking seriously, even though many view higher inflation as a temporary phenomenon. Pedersen notes that a number of central banks have already started to hike interest rates, including in Norway, Poland and Czech Republic. The US Federal Reserve has announced it will start to taper its asset purchase programme, and it is likely to start hiking interest rates around summer of 2022. The European Central Bank lags behind the Fed and is not expected to start hiking rates before the end of 2023.

Pedersen emphasises the central banks’ need for caution, given the sky-high levels of public debt, which have ballooned during the pandemic.

“You could see the debt situation becoming unsustainable in a number of years if interest rates go up too fast and by too much,” he says.

Nevertheless, Pedersen says he’s certain a controlled tightening of monetary policy will top the agenda at many central bank meetings around the world in 2022. The new year will also likely bring higher financing costs for most people and businesses.

What are the top three risks for the economy in 2022?

Despite all the challenges, Pedersen remains optimistic for 2022, although he expects growth to be somewhat more subdued than in 2021. He flags the following three risks as the biggest threats to his otherwise sanguine outlook:

1) The pandemic

Covid-19 will continue to play a significant role in the world economy in the new year.
“We’re not yet out of the woods. We’ve seen that with the Omicron variant,” says Pedersen. He does note, however, that with each new variant, the swings in financial markets have become smaller.
“That’s a good indication we’ve learned to live with the pandemic,” he adds.

2) Inflation

Pedersen says there are clear risks that cost pressure will lead to further increases over the course of 2022 and possibly also a wage-price spiral.
“I would really watch out for inflation over the next year, and it will be very interesting to see the central banks’ reaction,” he says.

3) Sharp corrections in the equity and real estate markets

Finally, Pedersen flags the risk of an unexpected event that causes sharp corrections in the stock and real estate markets.
“The increases we’ve seen in these markets over the last few years seem quite unsustainable,” he says, but notes that should such an event occur, the central banks would likely intervene.


Dig deeper

Listen to the full podcast with Nordea Chief Economist Helge Pedersen here.

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