Since the beginning of the pandemic we have been expecting a 'swoosh shape' recovery, similar to Nike’s logo.
The idea was that the restrictions would trigger a short collapse in economic activity – a shorter but much steeper contraction in GDP than in 'run of the mill' recessions – followed by an equally spectacular rebound when the economy reopens as consumers and businesses catch up on spending.
The third phase would be a gradual return to a more sedate growth rate, as the catch-up fades and the economy returns to trend.
Two elements could make this third phase even more mediocre: the possibility that the need to digest the increase in debt during the pandemic peak would force businesses to start a protracted phase of financial consolidation, and the possibility that economic policy would tighten to deal with the crisis legacy. We are still comfortable with this overall shape. We expect world growth to reach 4.1 per cent in 2022, a decent pace but below 2021’s 5.2 per cent.
Of the two downside risks, one seems to be firmly kept at bay; the rebound in corporate profitability in 2021, and the fact that many corporates kept the funds they raised (often from state-sponsored schemes) as cash on deposits have kept corporate finances healthier than feared. However, what we had underestimated was the magnitude of the rebound in consumer prices triggered by the 'decompression' of the global economy.
This decompression happened because many businesses, in anticipation of a deeper or more prolonged recession, cut back their orders to suppliers, those suppliers did the same, and may also have reduced staffing levels. So when the economic recovery happened at a faster and steeper pace than expected, there was a huge shortage of supply, which contributed to the present, very high levels of supply side inflation we are seeing.
While we continue to think we will see some price deceleration in 2022, some central banks – in particular in the emerging world, but not only there – do not want to take risks, and a quicker-than-expected tightening could dampen demand in the second half of next year.
But before we get there, we unfortunately need to spend some time on the possibility the pandemic continues to affect the recovery’s trajectory, given the emergence of the Omicron variant. What we have learned from the past two years is that our economies are getting better at dealing with Covid waves.
At each new wave, the impact on GDP was shallower. To some extent this reflects the higher level of preparation of the corporate sector. The communication systems have been tested and retested for phases of generalised hybrid working modes. But probably more profoundly the advent of vaccines has made it possible in many countries to move away from indiscriminate lockdowns and massive impact on economic activity to impose pass systems where access to certain services – which can thus continue to operate at fairly high capacity – is made conditional on an individual's vaccine status.