A year is a short time. Exactly one year ago, when I was looking ahead to 2021, it did not occur to me that we could be facing the same challenges again in a year's time. Very little has changed over the past 12 months. Equity valuations remain high and interest rates are low. A year ago, just like now, these were the brightest spots – as well as the main risks – in the marketplace.
Another point of concern in 2020 was whether the expansive fiscal and monetary policies would pay off. The answer to the latter question is yes, the stimulation packages have given a boost. Economies have recovered from the pits of the 2020 pandemic.
In fact, growth has been so strong that inflation rates have risen to 6.8% in the United States and 4.9% in the euro area. These are high figures, temporary or not. Forecasts suggest that supply-side constraints in industries will ease over the next year, but the key question may be whether these inflation figures will have time to affect wage demands and thus lead to more permanent price increases.
Corporate earnings have rebounded strongly in the USA and Europe from the lows a year ago. Even so, the projections for economic growth in 2022 remain fairly conservative.
Corona trouble
So much has already been written about the corona pandemic that there is very little new to say. But the fact seems to be that the coronavirus will continue to plague societies and economies. We are heading for a new normal, but it means living under the shadow of continuous restrictions and new vaccines in a way that will, with time, be perceived as normal. Surprisingly, it seems that the world can work in this way too. It is proof of dynamism and a capacity for adaptation on the part of people as well as economies. One can only wonder how smoothly the wheels of the world have been turning despite the coronavirus.
The continuing story of economic stimulation
Stimulation measures can be continued. Another story is whether we want to do so, or can afford it or whether we have a choice. There are signals that governments are becoming more cautious about pursuing massive stimulus programmes under the circumstances.
Economic stimulation was needed after the financial crisis, again after the euro crisis and now once again amidst the corona crisis. Expansive policies are widely recognised as being effective. At the same time, sovereign debt levels have risen and fiscal policy is already dominating monetary policy. If growth, inflation or market forces fail to save the day and reverse course for indebtedness on time, greater difficulties are likely to lie ahead.
Geopolitics
One way or another, geopolitical risks are on the table every year, this time in spades. Many people expect Russia to attack Ukraine soon. The move has been hanging in the air since 2014.
To some extent, war is already being waged in Eastern Ukraine. At the same time, a more total cyber war has been going on since the pro-Russian leadership was voted out in Ukraine in 2014. Experts say that earlier Ukraine was really not ready for a conventional war, but is now better prepared than years ago.
The West’s strength lies in its belief in the superiority of its own system and economic sanctions. The G7 countries recently issued a declaration saying that any Russian military aggression would have massive consequences and serious economic repercussions. Europe does not want war. A war would cause everybody to lose, as the western front would be greatly strengthened. At any rate, it would create geopolitical uncertainty in the marketplace and a spike in energy prices. We can only hope that the military equipment will be used exclusively for exercises and that the soldiers and materiel will be recalled.
Chinese real estate
The problems in China's real estate sector will also spill over to 2022. When the financial crisis hit the world, it took about two years from the fall of the real estate market in 2006 to the outbreak of the financial crisis in 2008. If the same timeline were applied to China, the problems in the Chinese real estate sector would appear to be a big issue in 2022. It will be interesting to see how the centralised system in tandem with the market economy will deal with – or fail to deal with – the problems that will arise. The problems would, above all, be felt in GDP growth rates, as the real estate sector accounts for a quarter of total output.
Year 2022
Year 2022 looks very different from 2021. Tensions appear to be running as high as in a penalty shoot-out in an ice-hockey game. Good times may well continue but just as well some of the risks may materialise and snatch victory. It is advisable to be prepared for both eventualities.
The writer is VER's CEO Timo Löyttyniemi.
