Why global economies should expect to see out 2022 in better shape than now
- Shanghai’s reopening and the Chinese government’s heavy-duty policy support for the Covid-19-battered economy are not the only good news
- The Fed’s firm handling of its interest rate rises also signals that US inflation can be tamed without the economy falling into recession, calming investor nerves
Not surprisingly, this combination of unprecedented challenges has meant investing returns have been disappointing so far this year.
These problems may not be completely resolved soon, but there are reasons for cheer as we approach the second half of the year.
Consumer prices jumped 8.3 per cent in April against 12 months earlier. But that was marginally down from the 8.5 per cent figure in March. The good news is that we have most likely seen the peak of year-on-year inflation, but the question is how quickly it can drop in the months ahead.
The inflationary impact of higher oil and food prices should fade. However, there are other areas where inflation could take longer to fall. Housing costs, especially rent, are usually very persistent.
The job market in the US is also very hot, with considerable labour shortages in the service sector. Employers will have to raise wages to attract new staff, or retain existing employees. These businesses will need to pass the higher costs onto customers, which could fuel inflation.
While the Fed has limited influence on food and energy prices, it can help cool the housing market and overall demand in the economy by increasing interest rates. Global investors are widely expecting the Fed to raise rates by half a percentage point in its June and July meetings, then move to a more modest 25 basis points for the rest of the year and early 2023.
This is a sensible path to tame inflation, and is not too harsh, which would risk tipping the US economy into a recession. Provided the central bank does not turn more aggressive relative to this expectation, we should see calmer markets in the second half of 2022.
The global economy has seen plenty of challenges – some say too many – in the past two years. Although things did not improve at the start of 2022, there are still reasons to remain optimistic.
In addition to the improvement in China’s Covid-19 outlook and calmer sentiment on Fed tightening, we should also see the transition of Covid-19 from pandemic to endemic in Asia. The region’s economies should gain momentum with the reopening of borders and a rebound in domestic demand.
It is easy to be depressed by the news headlines, but there should be some bright spots in the second half of this year.
Tai Hui is chief market strategist for the Asia-Pacific at JP Morgan Asset Management