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Growth Delayed, Not Derailed

The global economic recovery appears on track, but policymakers may be challenged to restrain inflation without stifling growth.

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Despite headwinds from the pandemic, the global economic recovery still appeared on track as 2021 neared its end. But inflation risks have risen. In 2022, investors will need to watch what fiscal and monetary policymakers do to try to stem price pressures while sustaining growth.

Although a COVID‑19 resurgence in Europe and the emergence of the highly mutated omicron variant are reminders that the pandemic is still with us, the net economic effect of past waves—such as the spread of the delta variant—has been to postpone activity, not prevent it. This pattern could give a modest boost to growth in the first half of 2022, Page says.

The bearish economic case now centers on monetary and fiscal policy, Page contends. As governments and central banks withdraw the massive stimulus applied during the pandemic, economic growth inevitably will slow sharply—or so the argument goes.

But slower growth doesn’t necessarily mean low growth, Page responds. He points to a number of tailwinds that he thinks could sustain the recovery in 2022:

  • Consumers are in a strong cash position, especially in the United States, where over USD 2 trillion is sitting in checking accounts and other short‑term deposits.
  • Asset appreciation has boosted household wealth both in the U.S. and globally.
  • Pent‑up demand for housing should continue to fuel new home construction.
  • Corporate balance sheets generally are in strong shape, with high liquidity and low debt ratios.
  • Transportation bottlenecks appeared to ease in late 2021, as seen by a sharp drop in global seaborne shipping costs.

Wealth Effect Could Be a Tailwind for Growth—but Also for Inflation

(Fig. 1) Global and U.S. stock market capitalization and core measures of U.S. consumer inflation

Wealth Effect Could Be a Tailwind for Growth—but Also for Inflation

Past performance is not a reliable indicator of future performance.

Market capitalization data as of November 30, 2021. Inflation data as of October 31, 2021.

1 Bloomberg World Exchange Market Capitalization. Tickers on Bloomberg: Market Cap: WCAU (World) and WCAUUS (United States).

2 The Dallas Federal Reserve Bank’s PCE trimmed inflation rate is designed to exclude extremely low or extremely high changes among 178 goods and services series tracked by the U.S. Bureau of Economic Analysis’ PCE Chain‑Type Price Index in order to smooth volatility and show the underlying inflation trend. These 178 categories add up to roughly 100% of nominal personal consumption. On average since 2009, the calculation has trimmed 24% of expenditures from the lower tail of the distribution of price increases and 31% from the upper tail.

Sources: Bloomberg Finance L.P., Bloomberg Index Services Limited (see Additional Disclosures), U.S. Bureau of Economic Analysis, and Federal Reserve Bank of Dallas.

The question, Vaselkiv says, is whether global consumers will convert their improved financial positions into higher spending. Assuming pandemic disruptions remain relatively manageable, he sees the potential for a surge in pent‑up demand in 2022 for travel, entertainment, and other “quality of life” services, as well as for new cars as auto production normalizes.

With interest rates still low and banks eager to put deposits to work, loan growth also could drive consumer demand, Vaselkiv adds.

But the same factors—free cash, wealth, pent‑up demand—potentially supporting growth also could prolong the sharp upswing in inflation seen in the second half of 2021.

Unless pandemic conditions deteriorate significantly, improving global supply chains and factory reopenings could ease the upward pressure on prices in 2022, Page suggests.

Much of the 2021 inflation surge, he notes, was concentrated in specific products—such as used cars and gasoline—that were particularly hard hit by supply/demand imbalances. The hefty price hikes in these goods seen in 2021 are unlikely to be repeated in 2022, he argues.

The bad news: Prices for many other key items—such as some foodstuffs, rent, apparel, and airfares—have lagged broader inflation. As higher energy costs and the appreciation in home prices ripple through the economy, price increases for these goods are likely to play catch‑up, Vaselkiv warns. Rents, in particular, appear poised to accelerate in 2022, Page adds.

Rising wages could present a longer‑term structural inflation risk, Vaselkiv says. While faster income growth should help support consumer spending, it could contribute to a wage‑price spiral as businesses pass along higher costs—in turn putting more upward pressure on wages.

“If inflation starts to permeate into wages, and that starts to drive inflation expectations, then maybe inflation will not be as transitory as we thought,” Thomson adds.

Profit margins have been very high for very long. But now the pendulum is swinging from capital to labor.

- Mark Vaselkiv, Chief Investment Officer, Fixed Income

Demographic and labor market trends could heighten that risk. Vaselkiv notes that occupations in a number of key sectors—including transportation, health care, and education—are seeing a wave of retirements, or soon will, as the baby boomer generation passes out of the workforce.

Meanwhile, large companies with deep pockets, such as Amazon, can afford to raise wages aggressively to attract the workers they need, Vaselkiv says. Other service industries and smaller companies could be hard pressed to compete.

“Profit margins have been very high for very long,” Vaselkiv notes. “But now the pendulum is swinging from capital to labor.”


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