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Returning to normal in 2022

The global economy is currently facing plenty of challenges, from disrupted supply chains to high inflation rates and the new wave of coronavirus. Overall, however, the outlook for investors in 2022 remains positive. Nonetheless, uncertainty is increasing again.

Ongoing supply bottlenecks following on from the coronavirus crisis and reopening of the economy are weighing on the global economy for longer than had been anticipated. Moreover, the emergence of the Omicron variant creates the risk of renewed delays within supply chains if there is a return to stricter coronavirus measures, for example in Asia.

Supply chain disruptions and long delivery times, especially for container shipping, are acting as a brake on growth. A prominent example is the semiconductor industry, forcing many vehicle manufacturers to temporarily shut their production lines this year. Plenty of other sectors are also reporting shortages and thus finding it difficult to fulfil the many orders on their books.

The experts at Union Investment anticipate that companies will be able to work their way through most of the substantial volume of orders that they have amassed since the reopening of the economy. Supply bottlenecks are likely to gradually ease once Christmas and Chinese New Year are over, as long as the Omicron variant does not prolong the disruptions. This is a risk because companies in some Asian countries previously had to shut down their factories – for example in the semiconductor industry – due to a zero COVID policy. If such disruptions do not materialise, however, there is a realistic chance that supply chains will return to normal over the course of 2022.

This also increases the possibility that companies will be able to get through more of their order backlog. After all, the supply bottlenecks do not seem to have prompted customers to cancel their orders so far. Clearing the supply bottlenecks should result in catch-up effects for many countries’ economies, not least Germany’s with its focus on industry. Manufacturing may therefore reprise its role as a growth driver for the German economy.

Pandemic means a tough winter ahead

Once again, the pandemic is creating uncertainty. Cases of the Delta variant have been rising for some weeks. The Omicron variant may now have an impact too, depending on how effective the vaccines are against it. Everyone agrees that winter 2021/2022 will be another tough one due to the pandemic. Unlike last year, however, the good progress with vaccine campaigns should mean that comprehensive lockdowns affecting the vaccinated as well as the unvaccinated can be avoided in the major economies. In fact, the situation should ease significantly once the winter months have passed. Advancing vaccination campaigns and effective medication should enable a transition from pandemic to endemic phase over the course of 2022. But we are not there yet.

Mixed bag of economic data

On a positive note, freight rates indicate an initial easing of the supply chain situation and Germany’s production data has recently improved a little. Until the latest wave of the pandemic, consumer spending had also begun to return to normal, with a shift from goods back to services. This also helps to reduce the problems in the supply chain, as these become particularly acute when demand for goods is high.

Pent-up demand for goods due to supply bottlenecks, but also for services

Spending on services still below pre-crisis trend

Pent-up demand for goods due to supply bottlenecks, but also for services
Sources: Macrobond, UBS, Union Investment, as at 10 December 2021.

At the same time, however, sentiment in the German economy has worsened of late. Companies have become less satisfied with their current business situation and more pessimistic owing to the ongoing supply bottlenecks and, above all, the fourth wave of coronavirus. GfK’s consumer confidence index in Germany and the US Conference Board’s consumer confidence index in the US both deteriorated in November.

Returning to economic normality

Although the latest economic data is not entirely positive, it is clear that the economy is unlikely to slump again, provided that no further lockdown is imposed for everyone, whether vaccinated or not. Policymakers, the economy and society are better prepared for the introduction of new measures to stop the spread of the virus. The economy has learned to cope to some extent with elevated infection rates.

Nonetheless, economic growth is not entirely immune to the increase in infections. Union Investment’s economists therefore predict that growth will slow down over the coming winter months, but that the new year will bring a fresh upturn. Manufacturing can then reprise its role as a growth driver for the economy. The strong recovery in 2021 is therefore likely to be followed by a normalisation of conditions in the new year and the global economy will continue to grow, albeit at a slower pace.

New momentum: disruptions to supply delay growth beyond 2022

Year-on-year change in real GDP

New momentum: disruptions to supply delay growth beyond 2022
Source: Union Investment, as at 10 December 2021.

Measured approach to monetary policy

Alongside the ongoing supply chain problems and the renewed escalation of the coronavirus pandemic, inflation is another dominant influence on the capital markets. In November 2021, Germany’s inflation rate climbed to its highest level for around 30 years, while US inflation reached a substantial 6.8 per cent.

Provided that the central banks do not take stringent countermeasures and instead continue to tread carefully and align their monetary policy with a moderate medium-term inflation outlook, the current economic upswing should not be stalled. The latest announcements – such as the decision of the US Federal Reserve (Fed) to taper its bond purchases and comments made by its Chair Jerome Powell – indicate that the US may move away from expansionary monetary policy more rapidly than previously thought because of potentially sustained inflationary pressure.

The pandemic emergency purchase programme of the European Central Bank (ECB) also looks set to end in March. Overall, however, the central banks are likely to transition away from ultra-expansionary monetary policy in a manner that should not be detrimental to the markets. While the Fed is gently applying the brakes, the ECB is simply throttling back slightly. The central banks are also faced with considerable uncertainty about how the pandemic will develop over the winter. A flexible approach without making decisions too far ahead is therefore becoming the order of the day. Of course the central banks always have the option of delaying the normalisation of monetary policy in the event of an economic downturn.

Continued chance of a good year for the capital markets in 2022

In conclusion, many uncertainty factors are currently affecting the capital markets, which are still seeking a return to normality following on from the coronavirus crisis. However, the pandemic’s impact on the capital markets is likely to diminish going forward, inflation rates should gradually normalise next year and supply bottlenecks are predicted to ease over the course of 2022. Meanwhile, uncertainty about the new Omicron variant of coronavirus will probably generate more volatility. But if the situation deteriorates markedly, the central banks will be able to step in with support or simply continue providing support, as the case may be.

In this environment, careful security selection and a more active approach will become all the more important when it comes to investing successfully. Given the fundamentally positive growth outlook and the current robust level of demand, there is still indeed the chance of a good year for the capital markets. Equities are expected to remain the most attractive asset class in 2022, and the commodity market is likely to maintain its upturn. Prices in this market will continue to rise, primarily driven by decarbonisation, and this will lead to a shift in the types of commodity that are favoured. In the bond markets, the rate of inflation and the first steps towards the normalisation of monetary policy will result in a moderate rise in yields for safe havens, such as German and US government bonds. Corporate bonds are becoming less attractive but still offer opportunities, for example in the high-yield segment.

 

As at: 13 December 2021