The global recovery from the pandemic has been impressive, led by China, the US, UK and some developing economies. But the rebound hasn’t been without problems, as the global rebound in demand hasn’t been met with a commensurate improvement in supply. Indeed, the problems around supply of materials and labour have prompted a sharp increase in inflation, which although the central banks of major economies have suggested will be temporary, has led to sizeable revisions to budgets and business plans for companies in some economic jurisdictions. Not all countries/central banks have been as relaxed about the increase in inflation, which sharp increases in interest rates in Latin America, Eastern Europe, parts of Africa, and some Asian economies.

The rebound in 2021 was impressive, with global growth set to be around 5.7% in 2021, but the pandemic has undoubtedly done significant damage to labour markets/labour supply, increased borrowing and costs for most businesses, and fractured supply chains for materials. We should take note of the increase in demand from the emerging economies, since they are creating some of the supply chain issues between manufacturers and the final point of consumption. In the West, price hikes will almost inevitably lead to further wage demands. Furthermore, the latest data shows significant supply chain shortages creating ongoing price chain inflation (input prices still rising faster than output prices), indicating that this is anything but temporary.

But should this be the catalyst for significant monetary tightening? In light of the significant drops in global economic output in 2020, and the inflation undershoots versus target in most developed economies in the past decade, it shouldn’t be. The US, which of all the major developed nations has bounced back quickest, is likely to be later to raise interest rates versus the UK, and that might prove game-changing in terms of the future economic outlook. 2022 might prove far more challenging for monetary and fiscal authorities than they currently believe it will be, and suspect growth will slow to broadly similar rates to those enjoyed pre-pandemic.

2022’s GDP numbers – The winners and losers

The global economy is set to see out 2021 with overall economic activity up 5.7% on 2020. The rebound in the global economy will still leave it slightly below 2019 levels.

2022 will be more challenging, with supply chain disruption likely to create more problems well into 2022, even if some of the inflation issues around energy and heavy industry alleviate. Expect global growth to slow, to 4.2% in 2022, and be even slower in 2023.

The bad news for the global economy is that there are fewer low hanging fruit to pick in terms of economies to recover. Mass immunisation, booster jabs and natural immunity from COVID is now embedded in Western economies and, by mid-2022, the same will be true across most of the Far East.

So who’s done best and worst this year, and who’ll enjoy stronger growth in 2022 and beyond?

UK economy – Supply chain disruption a clear and present threat

The outlook for the UK economy has, in recent months, worsened significantly. Increases in the cost of freight movement, and an inability of businesses to secure shipping from suppliers in Asia and other far away locations, could lead to problems in terms of a critical period for retailing. Add to this the new COVID variant, Omicron, which is thought to be more transmissible. That could further dampen activity levels.

That could lead to a slowing in momentum into the end of 2021 and early 2022, and that despite what appears to be a robust period of recovery for the labour market even as the furlough scheme is wound up. It is notable that the UK labour market is in a significantly better place than it was expected to be at this juncture, and throughout 2021 the UK has been ahead of where it was expected to be, thanks to the early start of the vaccination programme.

The signs of weakening have become more obvious over the course of the second half of 2021, such that growth is unlikely to top 7% as had been/is expected in 2021 from the likes of the Bank of England. It is more likely to come in around 6.5% for 2021, with the last quarter suffering from more significant headwinds than expected.

The challenges for the UK economy heading into 2022 include, but are not limited to, COVID, ongoing supply chain and labour market disruption, elevated imported inflation pressures, a higher taxation environment and the risks to consumption and investment spending this carries with it.

As far as supply chain disruption is concerned, it does not appear clear how this gets resolved, at least not for the next few quarters. The supply chain problems around materials and manufactured products will continue to be negatively impacted by raised energy prices and an imbalance of goods movement from East to West. The UK is only a small piece of that puzzle and businesses are unlikely to be able to adjust sufficiently to prevent the pass through of price increases in 2022. The Bank of England suggests that consumer price inflation could peak at 5% in early 2022, but could it peak higher and could elevated inflation pressures last longer than anticipated?

Additionally, the squeeze on incomes from higher inflation, coupled with the National Insurance tax increase and higher prices, could make 2022 a very difficult year for consumers and households, leading to a sharp slowing in economic momentum. That is unless average earnings grow more quickly than consumer prices, as they have done recently. Consequently, the risks to growth in 2022 are to the downside, with the UK likely to grow by only 3.5%. Whilst that growth would still be above trend, it is likely flattered by the fact that the beginning of 2021 saw growth undermined by another nationwide lockdown. It is unlikely that the UK government has a clear understanding of the pressures facing businesses across the nation. In fact, the increase in National Insurance could do considerable damage to investment by businesses and spending by the consumer.

All in all, the UK economic recovery from the pandemic is set to look far less impressive, just at the point when the authorities may be tightening the screw from a fiscal and monetary policy perspective.

The US - Bouncing back to health in 2021 after massive stimulus

The US economic recovery has been the most impressive of the major economies. From a position where there were more than 22m employees on the payroll at the height of the pandemic, and a drop of more than 10% in economic output, US output now stands 1.3% above its pre-pandemic level and payrolls are just 4.2m below the February 2020 peak.

The US economy is set to close out 2021 having grown by around 5.7%, and should grow a further 3.9% in 2022. The news hasn’t been all good though, with the recent batch of consumer confidence figures suggesting this has fallen below the lows seen immediately after the pandemic hit.

The growth enjoyed by the US economy comes after massive stimulus from the US Treasury over the course of the first four months of 2021. The fiscal authorities agreed to more than $5 trillion of fiscal stimulus over 2020 and 2021 from President Trump and President Biden, and Biden has now bet even bigger with over $4 trillion of spending on adult education, social care, energy transformation and infrastructure.

Perhaps that is why we’ve seen the spike in US inflation, with the consumer prices index reaching a three decade high towards the back end of 2021. That backdrop has led to the US Federal Reserve agreeing to reduce the pace of asset purchases, and there should be no additional purchases of assets by the end of June 2022 or perhaps earlier than that.

The rebound in the US economy could be challenged by high inflation, labour shortages, supply chain disruption and the impact of tax hikes. If it is, how will the central bank react to slower growth but higher inflation, particularly if much of this inflation is coming from overseas?

The US’s impressive recovery from the COVID pandemic has come at a tremendous fiscal cost and that fiscal cost is now evident in significantly higher than expected inflation. If the Federal Reserve were to pull the trigger on monetary tightening, could the US economy withstand it, or will the US endure even slower growth than expected in 2022? That has to be risk.

The Euro Area – ECB look at deflation and inflation problems within the same year

As 2021 began, inflation pressures in the Euro Area were weak, and the European Central Bank met the challenge of further restrictions and lockdowns for the economy with additional rounds of asset purchases. Things began to change towards the middle of the year, as supply chain disruption and a robust recovery led to headline inflation pressure picking up, with the rate climbing above 4% in Q4. The ECB now recognise that inflation may prove less transitory than initially expected, but they remain loathe to unwind the Pandemic Emergency Purchase Programme (PEPP) just yet.

Why is that? The Euro Area economy has not yet recovered all its lost output, with GDP still are 0.5% below where it was prior to the pandemic. Moreover, key members of the ECB remain unconvinced by the spike in inflation, and also recognise that any increase in interest rates carries with it the risk of derailing a relatively immature recovery.

2021 hasn’t been an easy year in terms of COVID either for the Euro Area. As we head into the winter, there has been a renewed spike in cases across many major economies, and that despite an impressive effort from European authorities to catch up on the vaccine programme. The Euro Area has surpassed the likes of the United States in terms of the percentage of the population fully vaccinated. The rise in new infections has led to renewed restrictions or lockdowns towards the end of 2021, which could undermine 2021 growth.

2021 growth though is set to be 5.1%, which is impressive given that the Euroland economy contracted by an additional 0.3% in Q1 2021, having seen output reduce 0.4% in Q4 2020. That growth should have been cemented by a strong Q4, albeit a slower expansion versus Q2 and Q3, but this is now under threat from the new COVID variant.

Unlike at the beginning of 2021, the euro is no longer as strong and, thanks to the actions of the European agencies responsible for vaccine procurement, there is no longer a lag between vaccine take up between Europe and the rest of the developed world. More importantly, it took the Euro Area economy slightly longer to begin its recovery, which means the economy has greater growth potential than the other major economies into 2022.

So in terms of 2022, growth is still expected to be an impressive 4.5%. The rate of improvement is likely to have slowed sharply, but the Euroland economy is carrying more momentum into 2022 than some other major economies. The challenge for Euroland is likely to prove greater in the second half of 2022, when fiscal adjustments are likely to be required and the European authorities start to pull the plug on stimulus measures.

The European Central Bank is in a stronger position than the likes of the Bank of England or the Federal Reserve in terms of where core inflation is. Core inflation in Euroland remains at or around 2%, unlike core inflation rates in the UK and US, where the rates are above 3% and 4% respectively. That means there is less immediacy in the need to adjust monetary policy, and suggests the inflationary issues are more transitory in nature.

Rest of the World – Inflation risks viewed differently

As suspected in the previous years’ economic outlook, the Chinese economic recovery was the most impressive of major developed/developing economies. After growth of 2.3% in 2020, unlike virtually every other economy on the planet, the Chinese economy should follow that up with growth of 8% in 2021, but then endure a slower period of growth in 2022, with the rate of expansion slowing 5%. China is seeing inflation rates pick up, albeit from very low levels, and the rise in inflation globally could prove to be a challenge for the global economy in 2022.

China also faces the potential challenge that over-development threatens. As the Evergreen scandal highlighted, the Chinese economy faces threats from over-leverage. If interest rates have to rise significantly, in order to tackle supply chain-driven inflation and any second-round effects from that (for example wage inflation or additional increases in consumer prices), then the threats to economic stability could rise as well.

The other Asian powerhouse, India, has bounced back better than was initially expected, with 2021 growth set to exceed 9.5%, taking the GDP rate to within 2 percentage points of pre COVID levels. 2022 should prove to be another year of progress for India, with growth expected to again exceed 9.5% for the full year. India though is equally not insulated from the global headwinds of inflation, and the Reserve Bank of India has cautioned that action may need to be taken if inflation picks up, having been in the upper end of the target range for all of 2021 so far.

What a difference a year makes for Australia and New Zealand. 2020 saw the governments of both nations adopt a very tough stance against COVID, but one that eventually failed and had to be replaced by a strategy of mass vaccination. Even that hasn’t gone completely to plan, starting far later than programmes in Europe and the US.Take up rates of vaccination now exceeding the rates seen in the US, UK and across much of Europe, the environment for growth is, and has been positive. So perhaps it is no surprise that the Australian economy is set to grow by 5.1% in 2021, and the New Zealand economy by 6.5%. However, much like the rest of the world, inflation is, or will become, a major problem. Inflation overshoots could lead to a response from the central banks, and consequently a loss of economic momentum. Growth rates in 2022 are set to slow, although more so in New Zealand than in Australia. With elevated inflation risks in 2022, growth in Australia and New Zealand is set to slow to 4% and 2.7% respectively, and there are likely to be downside risks also associated with COVID and any resurgence in infections, hospitalisations and deaths.

Canada has enjoyed a healthy recovery and looks set to have grown by 5% in 2021. The economy will have more than recouped all lost output by the end of 2021. Unemployment still has some way to go before recouping all the lost jobs, so that should provide momentum into 2022, and vaccination rates are very high in Canada, whilst infection rates are very low. That could provide the Canadian economy with more momentum throughout 2022, with 4.7% growth forecast.

For the developing world we have seen elevated concerns over the rise in inflation, such that economies in Central and Latin America, Eastern Europe, and parts of the Far East have already begun to tighten monetary policy. Furthermore, the vaccination rates in many of these economies are far lower than in the Western developed world. That could lead to a serious arresting of economic momentum if there are fresh waves of COVID over the course of 2022, undermining economic momentum further. The Brazilian economy, despite being set for a bounce of 4.9% in growth in 2021, is still under considerable pressure, with the unemployment rate over 2 percentage points higher than pre-COVID, and the Selic rate having increased from 2% to 7.75% so far this year. Brazilian GDP could rise by 5.7% in 2022.

One final economy to focus on is Turkey. The country is suffering from a sharply depreciating currency after President Erdogan dispensed with the services of another central bank Governor, and the new Governor sanctioned a rate cut in the midst of an inflation spike. Investors have lost confidence in the central bank’s independence, and its ability to control inflation. The depreciation of the Turkish lira will give the country a more prolonged inflation headache, and cuts in interest rates won’t help to encourage growth, if inflation spirals out of control. Turkey could be heading back to the bad old days of the 1980s and 1990s when hyperinflation destroyed the value of the currency, and the nation’s prosperity.

Monetary policy – From negative to positive in the space of a few months

Before we reached the middle of 2021 the clamour for negative interest rates appeared to be increasing once again, and fears grew that there would be a need for new restrictions or lockdowns across the world. How quickly the markets disassociated themselves with that idea though, as supply chain disruption wreaked havoc on input prices, with commodity prices jumping for construction materials, and semiconductors, whilst energy prices leapt due to geopolitical issues and media-manufactured crises. Discretionary goods prices started to rise, albeit slowly, but the pace intensified as we headed towards the seasonal discounting and buying period associated with the run-up to and aftermath of Christmas.

Price rises have swung the argument decisively in favour of interest rate increases, with many commentators forgetting about the lasting damage to economies from the COVID pandemic and instead lending their voices to calls for a swift end to ultra-loose monetary policy.

2021 may well be remembered as the death knell for the argument that inflation was dead, as some had suggested in previous decades. As it turned out, inflation was dead, although it was in a prolonged coma, held down by an abundant supply of materials and labour. The COVID pandemic has challenged both supply chains and labour mobility, both of which may take time to fix.

Meanwhile, there are few signs as yet of second-round effects, in terms of wage inflation or additional hikes in prices on the high street, across most of the developed world. It may prove to be the case that the supply chain disruption lasts longer than anticipated, but if that leads to a reduction in household disposable incomes (prices rising faster than wages) then central banks will be placed in an invidious position where they are raising interest rates whilst growth is slowing, or even negative.

So what will happen in 2022 regarding monetary policy?

Starting with the United States, the position of the Federal Reserve is by no means clear. They began the process of tapering the asset purchase programme in late 2021, but additional purchases won’t end until around the middle of 2022. Meanwhile, inflation is at multi-decade highs from a headline and core perspective, but is expected to drop back quickly over the course of 2022. The economy, having already recouped a lot of lost output will find the going for additional growth more tricky, and the Federal Reserve will also have to be mindful of the global situation regarding growth and COVID.

The interest rate markets think that the Federal Reserve could raise the targeted Fed funds rate by 75 basis points over the course of 2022, taking the upper limit to 1%. That feels like an overreaction, and instead one hike, of 25 basis points, is forecast for 2022, with three further hikes, each of a quarter-point, in 2023. The recovery should be given time to blossom. Although the US has recouped its pandemic losses, it is still short of its GDP potential having missed out on 18 months of expansion.

The Federal Reserve could yet leave monetary policy on hold until the early part of 2023. Instead of utilising the sledgehammer of interest rate increases, the Federal Reserve could instead adopt a policy of asset sales, to reduce the size of its balance sheet. If they choose that option, the markets may experience sizeable upheaval, particularly the bond markets.

In the UK, the arguments for prolonged ultra-loose monetary policy faded late in Q2 2021, as the risks of sustained supply chain disruption began to manifest themselves. Commodity prices rose over 20% during that quarter, and rose a further 7% in Q3. The pressures on UK consumer price inflation saw the headline rate rise to 2.5% year-on-year by the end of Q2, and 3.1% by the end of Q3. Bank of England expectations for the peak in inflation were for it to exceed 5% in early 2022.

So is it obvious that UK interest rates should rise quickly to quell the inflation pressures seen over recent quarters? No, as arguments for a sharp increase in UK interest rates are facile. Those that argue in favour of significant rate increases focus on the rise in inflation and not the causes of it, nor indeed the central bank’s ability to control it. Market expectations for UK official interest rates forget that interest rates would be higher than pre-pandemic levels, whilst the economy is smaller than it would have been had it continued to grow in 2020 rather than shrink at the fastest pace in modern economic history.

Furthermore, the UK is facing tighter tax conditions than it has in the past few decades, something that could offer significant headwinds to the UK’s recovery.

The Bank of England’s Monetary Policy Committee operates on a 2-3 year cycle for the monetary transmission cycle, by which point the inflation issues should have worked through the system. Moreover, with a persistently higher tax environment likely to be in evidence, the risks are for slower growth over the medium term.

Interest rates in the UK should therefore peak between 0.75% and 1%, and only in 2023, when the recovery is better established. In the meantime, the Bank of England can tighten monetary policy by reducing its stock of assets purchased in the COVID pandemic. Reducing the stockpile of assets would be a more precision weapon than cluster bombing the economy with a series of interest rate hikes.

As for Europe, as was said last year, the ECB is likely to be on hold or looser for longer. 2021 was a year of rebuilding as far as the Euroland economy was concerned, and the European Central Bank helped by accelerating the Pandemic Emergency Purchase Programme (PEPP). The euro started 2021 robustly, having strengthened into the end of the year against the UK pound and US dollar, and that perhaps suppressed some of the early inflationary pressures. However, as the year went on the euro came under pressure and inflation picked up, exceeding the headline target rate of 2% in July, and climbing to more than double the target rate by October.

The ECB still, mainly, thinks that the rise in inflation is temporary, and that is probably correct. Core inflation pressures have not picked up as significantly, with the core rate remaining around 2%. The likelihood is that the inflation problems are already beginning to abate, and that although inflation will overshoot for much of 2021 on a headline basis, the core rate of inflation should have dipped back below 2% by the middle of 2022.

Reasons for a rate increase will build more in 2023, with further economic improvements and the prospect of the labour market conditions tightening, prompting above consumer price inflation pay increases. It is unlikely that the Euro Area will suffer from sustained above-target CPI inflation because of wage growth, but the investment in greener/environmentally friendly energy and shifts in supply chains could mean more sustained above-target inflation pressures.

The refinancing rate is therefore likely to remain at 0% in 2022, before rising to 0.4% in 2023. There is room for more monetary tightening, but, much like the Bank of England, from a reduction in the assets bought via the Pandemic Emergency Purchase Programme.

Rest of the World

Monetary policy in the rest of the world has been more interesting in 2021. As inflation rates started to increase, central banks responded either by reducing or stopping the asset purchases schemes that had been deployed in the wake of the pandemic, or by starting the interest rate hiking cycle.

In Eastern Europe we saw hikes from the central banks of Poland, Hungary, the Czech Republic, and Romania. Warnings about inflation were rife, and in the cases of the central banks of the Czech Republic and Hungary this prompted larger interest rate rises to tackle the threat.  The rise in inflation is, most likely going to continue into 2022, and rates are likely to rise further across 2022.

In Latin America also we’ve seen interest rate rises from the likes of the central banks of Brazil, Mexico, Peru and Colombia. The central bank of Brazil could see interest rates rise to within a whisker of 10% over the course of 2022, which means that interest rates are fairly close to peaking (currently 8.5%). For Banxico, the central bank of Mexico, rates have risen from 4% to 5% in 2021 and, with inflation above target and likely to remain so, further hikes are likely in 2022. Rates could rise to 6.5% in 2022 to contain those inflation pressures. As for other South American central banks, further hikes are also likely in 2022, but markets will closely watch developments in the COVID pandemic also, and that could limit future interest rate tightening.

Canada’s recovery, which has gone well, could prompt interest rate hikes in 2022, but only one, with the Bank of Canada believing that the inflation risks are temporary. The BoC could raise interest rates more quickly, but they would most likely do that on the back of heightened wage inflation concerns. To note, so far there has been little evidence of persistent wage growth in Canada. 2023 could see Canadian interest rates rise by more, prompted by the ongoing recovery and more domestic sources of consumer price inflation, but even then the central bank will act cautiously so as to not undermine the recovery for future years.

As for Australia and New Zealand, the central banks find themselves in different positions heading into the end of 2021. The Reserve Bank of Australia is set to end the year with official interest rates remaining at all-time lows of 0.1%. The official commentary from the RBA suggests they might not hike interest rates until 2024, but the likelihood is that a strong recovery in 2022 and returning inflation pressures could prompt a hike in rates in early 2023. The Reserve Bank of New Zealand on the other hand hiked interest rates twice towards the end of 2021, after having aborted a tightening in Q3 because of a resurgence of COVID cases. 2022 will see interest rates rise further, as the RBNZ continues to try and dampen inflation pressures up to 1.25%, most likely in the first half of 2022.

The FX outlook – 2022 bigger swings ahead

2021 saw confidence rebuilt in risk appetite but, towards the end of the year, that confidence faded, and with it the gains in GBP, EUR and a lot of other currencies against the USD. It wasn’t so much that the markets were downbeat about the outlook for economic activity, just that they were no longer surprised by economic improvements. Optimism about growth faded, and pessimism about inflation increased, which in turn fuelled interest rate hike expectations.

It was clear in 2021 that the global economic outlook still focused on the recovery from the pandemic, but governments weren’t necessarily helping the process of recovery by threatening to raise taxes on corporates and individuals. The choices made by some fiscal authorities may well play out in terms of currency performance in 2022 and beyond, dependent on whether or not these decisions prompt a significant slowing in economic activity or not.

2022 could be a year of sub-optimal choices as far as the monetary authorities are concerned. Central banks could tighten monetary policy too quickly only for inflation pressures to recede. Alternatively, policy might not be tightened enough and inflation continues to climb. The currency that performs best will be the one with the central bank that best manages this process. The European Central Bank appear to be in a strong position with regard to this, having experienced less severe inflation pressures to date. Will that persist in 2022, and could we see a EUR recovery?

Having tested higher in 2021, towards $1.2350, EUR/USD is set to end 2021 at the bottom of the range since the outset of the pandemic and the end of the first lockdown in 2020. Materially there is room for the euro to recover into, provided the lost momentum into the end of 2021, due to new COVID restrictions, can be recouped swiftly. The euro is likely to bounce back towards $1.20 in 2022, supported by a more rapid pace of economic growth than the US.

For the pound, it could find the going trickier against the US dollar. The dynamic for rate increases, on the back of a tight labour market, might end up being one huge banana skin for the Bank of England. Remember forward guidance introduced in the early 2010s, when the Bank of England indicated that a certain unemployment level would potentially signal an impending rate increase? Notably then, the BOE had to alter the ‘guidance’ several times, before eventually hiking interest rates. This time around the BOE are signalling that the labour market is tight, but failing to recognise the significant supply disruptions caused by the pandemic. Early and significant rate increases could upset the UK’s growth, which would likely prove detrimental to the pound against other major currencies. GBP/USD may struggle to regain the high $1.30s over the course of 2022, and there is likely a greater risk of a move to $1.30 and below. Against the euro, the pound could suffer even more, with a drop into the €1.10s or even below.

The global economy has not returned to normal as had been expected by most governments and monetary officials in the final phases of 2020. Output in a number of key economies remains well below pre-pandemic levels, and in others, the economies are well below potential. The supply chain disruption, which continues to lead to price spikes, and the new variants of COVID, are likely to create additional volatility in the FX markets, including emerging markets.

The recovery in oil prices seen in 2021, hasn’t had a lasting positive effect on the likes of the Canadian dollar, Australian dollar, Norwegian krone or Brazilian real. The CAD and Aussie could strengthen in the early phase of 2022, but oil prices are expected to fall back over 2022, and that could undermine these currencies. As for the krone and real, there is potential for these currencies to outperform in 2022, with Norwegian interest rates likely to rise higher than currently predicted in markets, and the Brazilian economy likely to rebound more than forecast by the likes of the International Monetary Fund.

The Chinese yuan may continue to strengthen in 2022 also. The Chinese economic recovery hasn’t been adversely impacted by recent corporate issues. Though growth is likely to slow in 2022, the progress of transformation towards a more developed, capital investment intensive economy, China’s performance will look favourable versus other major economies.

As opposed to 2021, when the Indian rupee was expected to, and did, underperform, 2022 looks a lot more positive. The Indian economy is recovering strongly, and should replicate the 2021 rebound, which puts the rupee in a better light. Watch for the rupee to rally against the US dollar and UK pound, with an appreciation of the order of 5-8% over 2022.

Finally, the Turkish lira, which has depreciated more than 40% in 2021, could depreciate even faster in 2022. It would not come as a surprise for a move into and beyond 20 lira to the US dollar in the first half of 2022.

The year ahead summary – volatility reigns

So much hope was placed on the vaccine rollout, but that hasn’t prompted a return to anything like normal activity. Services businesses across Europe, worldwide travel (business and tourism), and traditional retail all remain severely negatively affected by COVID, and supply chains remain fractured.

The emergence of the new COVID variant, Omicron, towards the end of 2021 leaves the economic and financial market outlook more uncertain than it otherwise would have been. The prospect of new or prolonged restrictions to movement and business operations could delay the decision-making process of the major central banks. It could also prove significantly more detrimental to the UK pound, where the economy is more heavily services orientated than those of the US and Euro Area economies.

The currency markets are likely to still be subject to significant swings in both directions in 2022, but the risks are for a reversal of euro weakness seen in H2 2021, and a continuation of the UK pound’s weakness. The GBP/EUR rate is at risk of revisiting December 2020 lows in the €1.07s.

There are likely to be more COVID variants of concern in 2022, meaning the risks on activity are to the downside, and so are the risks on interest rates. Raising interest rates now because of inflation pressures, after a decade of sub-target inflation could prove to be as big a mistake as fiscal austerity after the financial crisis in 2008.

The pandemic may have more years to roll through, and the room for optimism about any return to normality is rapidly shrinking.

2022 could see emerging markets outperform the developed world, as the sourcing of raw materials and manufactured products lead to new investments in the developing world. One economy likely to miss out on this is Turkey. The central bank has lost all credibility due to political interference. Intervention in FX markets to try and stabilise the lira is likely to prove temporary, and there could be a sharp further sell-off in the lira throughout 2022.

Disclaimer: The views and forecasts above are the opinion of the author’s. They do not constitute advice.