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

Tai Hui

Published: 12:30pm, 10 Jun, 2022

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The first half of 2022 has been a difficult year for both the global and local economies. In Hong Kong, the Covid-19 fifth wave added extraordinary pressure on the economy, not to mention the lives lost.

Globally, the worst military conflict in Europe since World War II is taking place between Russia and Ukraine. And a number of cities in China, including Shanghai, went into lockdown to avert an Omicron outbreak, threatening global production and supply chains.

In the US and a number of other developed economies, inflation is running at levels not seen in decades and the Federal Reserve has had no choice but to raise interest rates aggressively.

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.

Let’s start with China. The number of Covid-19 daily infections has started to decline sharply, which allowed Shanghai to loosen the lockdown restrictions on June 1. Meanwhile, the State Council recently held a nationwide meeting, which highlighted the importance of boosting the economy after the sharp drop in consumption in April, and possibly in May as well.

The government has implemented a series of policies to bolster sentiment, including tax cuts, social security payment deferrals, loan support facilities for small and medium-sized enterprises, and ramping up infrastructure investment, such as in transport and renewable energy.

Work continues on April 26 on an offshore wind power project in Yingkou, in northeast China’s Liaoning province. The government has ramped up infrastructure investment as part of its efforts to boost the economy. Photo: Xinhua

While the full-year economic growth target of 5.5 per cent will be hard to achieve, a robust recovery in the second half of 2022 should still set an upbeat tone heading into the 20th Party Congress in November.

In addition to policy stimulus, consumers and local businesses will be mindful of possible new waves of Covid-19 later in the year. Hence, authorities may need to adopt a more pragmatic approach on future lockdowns while maintaining the zero-Covid strategy. Enhanced protection from higher vaccination rates and effective Covid-19 treatment to limit severe cases and deaths can also allow Beijing to be less stringent in its efforts to contain the pandemic.

Why is China reluctant to ‘live with Covid’? It’s not just politics

In the US, the Fed has turned very hawkish since late 2021 with inflation at its highest level in decades. This has led to a sharp rise in government bond yields and volatility spikes in financial markets.

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.

Workers leave the Marathon Galveston Bay Refinery in Texas City, on May 10. The US job market is red hot, with considerable labour shortages in the service sector. Photo: Getty Images North America / AFP

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.

Inflation will drag down growth, but US should avoid recession this year

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