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Executive Summary
January saw rising geopolitical tension attributed to a potential conflict between Russia and Ukraine and its possible adverse impacts on the global economy. In addition, challenges from last year such as the spread of the Omicron variant, rising inflationary pressures, China’s economic slowdown, supply chain bottlenecks and rising debt levels have been carried forward into 2022.
What to expect in 2022?
The Omicron variant of COVID-19 continues to cast a shadow on global economic recovery with global cases reaching 359 million and deaths rising to 5.62 million. Global markets are also keeping tabs on a series of US Federal Reserve rate hikes expected this year which raises concerns about the outlook for emerging markets in particular. Other major factors are also in play such as global price levels and the growing geopolitical tension with Russia.
The IMF and World Bank cast doubt on global economic performance for 2022: The World Bank downgraded its global economic growth forecast for 2022 to 4.1% as stated in its latest Global Economic Prospects, down 0.2 percentage points from a previous projection. Reasons for the downgrade included a resurgence of Covid-19, uncontrolled global inflation and an increasing debt burden seen in many nations. The IMF chief recently stated that 2022 will be more difficult for the global economy than 2020 citing similar reasoning.
A series of US Federal Reserve rate hikes expected as concerns about emerging markets deepen: The US Federal Reserve has signalled that it’s gearing up for at least three rate hikes this year after inflation hit a 40 year high. This has resulted in a great deal of concern for emerging economies. This month the Federal Reserve chair stated that the US economy is strong enough to withstand monetary tightening and even a surge of the Omicron variant. Analysts predict that a rate hike could have a significant impact on countries such as Indonesia, Brazil, Mexico, South Africa and Turkey.
Further sanctions levied on Russia could have adverse impacts on Europe: Rising geopolitical tension as a result of a potential conflict between Russia and Ukraine is adding pressure on the West to take a tough stance on Russia. One possibility being further sanctions. However, Russia remains the European Union’s top oil and natural gas supplier. Sanctions levied on Russia would increase energy prices further, creating more inflationary pressures in Europe. Europe was affected by past sanctions aimed at Russia following the annexation of Crimea in 2014.
Has the Chinese economy truly rattled after a series of hiccups last year, and is global inflation still on a steep climb?
The Chinese economy has taken a beating after last years real estate crisis sparked by Evangrande and a fuel shortage. China has taken measures to drive the economy forward and prevent a slowdown. However, rising Covid-19 cases has reduced the efficacy of these measures. Another key factor burdening the global economy is rising inflation, that doesn’t seem to be as transitory as previously expected by the Federal Reserve, both the US and the EU continues to see rising inflation figures while Turkey sees staggering two digit inflation rates.
China is continuously slashing lending rates to avoid an economic slowdown: The People's Bank of China dropped its one-year prime lending rate by ten basis points to 3.7% recently, the second reduction in a month. Its five-year prime loan rate was also cut by five basis points to 4.6%, the first cut to that rate since April 2020. China's central bank's decision to lower both rates is the latest in a series of moves to relax monetary policy as the country grapples with a deepening real estate downturn and slower economic development.
Goldman Sachs cuts China’s economic growth forecast: Goldman Sachs revised down its 2022 China economic growth prediction to 4.3% from 4.8% before, blaming tighter limitations on commercial activities targeted at limiting the omicron Covid-19 strain. China's economy grew by 8.1% in 2021, but growth slowed to 4.0% in the final three months of the year, according to government data.
US inflation continues to hit record highs: The cost of goods and services in the US continues to increase at unprecedented rates, with inflation hitting 7% in December compared to the same month last year, marking it the seventh month in a row that inflation has surpassed 5%.
Euro zone inflation reached a fresh high of 5%: Europe's headline inflation rate was 5% for the month of December. The statistic is the biggest on record, and it comes after November's all-time high of 4.9%. The majority of the rise was due to increasing energy prices. Financial analysts have been arguing whether the European Central Bank should be more aggressive in combating increasing prices.
Turkey’s inflation at its highest level since 2002: Inflation in Turkey soared to a 19-year high in December, fuelled by the lira's depreciation and President Recep Tayyip Erdogan's demands for lower borrowing costs. Last month, the annual consumer inflation rate reached 36.1%, the highest since September 2002 and a significant increase from November's figure of 21.3%.
How have commodities been performing?
Oil prices on a rise:
Oil prices rose to a peak of just above US$89 per barrel on the 20th of January and then fell to roughly US$85 on the 24th of January to only start rising again up to around US$87 by the 26th of January. Tensions between Ukraine and Russia, threats to infrastructure in the UAE from Yemen’s Houthi forces, and OPEC+ oil producers’ challenges in meeting their monthly output growth objectives have raised fears of supply disruptions.
Gold prices hit two-month high:
Gold prices rose to a peak of roughly US$1850 an ounce on the 25th of January, while the price has been volatile it has generally been on a rising trajectory throughout the month. The US Federal Reserve's announcement on monetary policy tightening, as well as the International Monetary Fund’s downgraded forecast for global economic growth in 2022 due to worsened outlooks for China and the United States contributed to the rise in gold prices.
Top 5
Fed rate hikes will intensify a global debt crisis, research warns
Interest rate hikes from the U.S. Federal Reserve and other central banks are likely to worsen a global debt crisis, particularly for developing countries, according to a new report from U.K. non-profit the Jubilee Debt Campaign.
Saudi Aramco Says Oil Demand’s Nearing Pre-Pandemic Levels
Saudi Aramco stated that demand for oil is nearing pre Covid levels and that global producers are investing too little on increasing the supply. Oil prices exceeded US$ 85 a barrel as the omicron variant seemed to affect the global economy less than previously thought. At the same time major producers are struggling to increase their output.
China rate cuts not enough to stabilise economy: ex-PBOC adviser
Looser monetary policy in China won’t be sufficient to stabilise the economy, a former adviser to the central bank said, arguing that the government needs to speed up spending as well. The impact right now of any monetary easing is limited as credit demand is relatively weak, he said in an interview last week.
Is the IMF ready for the next emerging market debt crisis?
During the past two years, there was a reduction of emerging market economies seeking assistance from the IMF, given the high liquidity in the global markets with the Fed and ECB continuing to support the economies. However, with the US expected to increase interest rates, there will be a flood of emerging economies seeking help from the IMF, creating a real challenge for the organization.
Why Southeast Asia Has Reason to Be Optimistic About 2022
Last year, Southeast Asia’s low vaccination rates and strict lockdowns reverberated across the world, mostly in the form of supply shortages. But the region’s growth is poised to make a gradual comeback this year, with many countries now having boosted their vaccination efforts, prompting policymakers to be more willing to refrain from ordering lockdowns and use gentler containment measures.
Compiled by: Emaad Rizwan
Disclaimer: This information has been compiled from sources believed to be reliable but Frontier Research Private Limited does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment as of the date of the material and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The recipient of this report must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned herein may not be suitable to all investors.
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