While high inflation in the U.S. is rattling Joe Biden's poll numbers despite positive economic trends, the eurozone faces an increased risk of temporary setbacks in growth momentum due to Omikron in addition to increased inflation. Swiss Life Asset Managers forecasts comparatively low GDP growth for Switzerland in 2022.
Two years after the outbreak of a new type of virus became known, the traces of the pandemic in the Swiss economy are becoming increasingly obvious, as Swiss Life Asset Managers notes in its economic outlook for January 2022: Thus, the performance of suppliers in the economic sectors "Hotels and restaurants" in the third quarter of 2021 still 17% below the pre-crisis level of the final quarter of 2019. In contrast, the pharmaceutical industry and retail trade grew by around 14% and 6%, respectively, over the same period.
Over the past few months, the flexible Swiss labor market has ensured that those previously employed in sectors particularly affected by the pandemic have reoriented themselves. Accordingly, the shortage of skilled workers in these industries will continue to worsen. In the short term, the renewed rise in the number of cases and the threat of overburdening healthcare facilities are dampening the prospects for the domestic economy. However, according to Swiss Life AM's Economic Research experts, this is not the main reason for their cautious GDP growth forecast. "Instead, we expect the global economy as a whole to experience a weakening tailwind from monetary and fiscal policy support measures. Compared to the latest forecasts from the State Secretariat for Economic Affairs (Seco), our projections are much lower: While Seco expects GDP to grow by 3.0% and 2.0% in 2022 and 2023, respectively, we expect growth of just 2.4% in 2022 and 1.2% in 2023."
Inflationary pressures are much less pronounced in Switzerland than in other developed economies. The lower weighting of energy prices in the inflation calculation plays a role, as does the price-reducing effect of the market entry of new foreign retailers. "The decisive factor for the outlook, however, is the strengthening of the Swiss franc against the euro. Prices for certain imported goods will become cheaper in 2022", according to experts.
Forecast comparison
USA: Biden's dilemma
Fourth-quarter figures published so far confirm Swiss Life AM's suspicion that the U.S. economy has picked up steam in both the industrial and service sectors. The ISM Purchasing Managers' Index for service providers even reached a new all-time high of 69.1 points in November. The gradual easing of supply bottlenecks and the return of people to the labor market are contributing to the improved economic picture.
Joe Biden, on the other hand, is at a historic polling low for a president by U.S. standards. His approval ratings have deteriorated dramatically in 2021 – the highest inflation since the 1980s is a contributing factor, according to economists. While the bipartisan infrastructure program has already been signed into law, Biden's Build Back Better Act faces opposition in the Senate, even from Democrats. Legitimate fears that a renewed expansion in government spending will further fuel inflation are likely to lead to further trimming of the program, according to Swiss Life AM's Economic Research.
Inflation continued to rise in November, reaching 6.8%, driven by energy and consumer goods prices, while inflation in services was "surprisingly low" dropped out. The Economic Research forecast: "We expect energy and goods prices to make a neutral to negative contribution to inflation in 2022 and the situation to normalize from January onwards. But because the U.S. is dragging a strong base effect into the new year, inflation is not expected to fall below 3% until October 2022."
Eurozone: Fiscal peace signs
According to Swiss Life AM, the change of government in Germany aroused fears in France and the southern member countries of the monetary union that the FDP, which is part of the traffic light coalition, might demand a rapid return to fiscal discipline. However, the first pronouncements of the new German Finance Minister Lindner do not point in this direction at all. The new coalition is open to discussing more flexible budget rules with its European partners. So there is an opportunity to take further steps to solidify the monetary union.
Two years after its outbreak, the pandemic is still weighing on economic momentum in Europe. With the emergence of the Omikron virus variant, the risk of temporary setbacks on the economic recovery path remains significant throughout Europe, he said.
The elevated inflation figures sparked a wave of criticism of the ECB. There is no doubt that the fact that inflation in the euro zone currently stands at 4.9% is a source of political tension. But experts say it's important to keep in mind that more than half of the current inflation rate is explained by the rise in energy prices. Unlike in the U.S., rising energy prices remained a fleeting phenomenon, limited to a few goods in the basket.
Germany with catch-up potential
Germany has the greatest catch-up potential among the leading economies, according to Swiss Life AM. So far, the economy has recovered less quickly from last year's slump than that of the U.S. or its neighbors Switzerland and France. Compared with France, Germany has the disadvantage that its export economy was geared more strongly to the non-European market after the financial crisis.
In the current upswing, however, unlike in 2009, the emerging economies of Asia and South America are not taking on the role of growth locomotive for the global economy. In addition, many Asian countries are pursuing a strict "zero covid" policy-Regime. Thus, Germany is doubly affected: Demand from emerging markets is lower than that from richer economies. At the same time, supply bottlenecks for intermediate products are weighing on automakers. There have recently been increasing signs of an easing in the supply of semiconductors. In the fourth quarter of 2021, industrial production is therefore expected to have grown strongly, according to Swiss Life AM's Economic Research.
By November 2021, the inflation rate at consumer level, measured by the price index of the Federal Statistical Office, had risen by 5.2 percent. Prices for individual daily necessities and for gasoline, diesel and gas rose even far higher. Often lost in the noise about individual observations is the fact that one-off effects have contributed significantly to this increase. "The coming months will already bring a sharp drop in inflation rates. We expect that annual inflation will still be 2% in mid-2022", according to Swiss Life AM economists.
At 2.8%, the inflation rate in France was significantly lower in November. The forecast: "We expect a further increase to 2.9% by the end of the year. This value represents the peak in the current cycle. We expect inflation to fall to 1.0% by the end of 2022, assuming unchanged energy prices. In the medium term, inflation is expected to settle at levels close to the ECB's inflation target, i.e. around 1.8 percent. Compared to the decade before the pandemic, this is a 0.6 percentage point increase."
Japan: Accelerating growth
Japan is the only major country besides Germany where Swiss Life AM expects growth to accelerate in 2022. the economists see the main reason in the expected gradual easing of supply bottlenecks, especially in the auto industry. Semiconductor production is running at full speed globally and carmakers have announced that they could ramp up production as early as the fourth quarter of 2021. Indeed, Japanese auto production increased in October for the first time since January 2021, up 28% month-on-month.
China: balancing act with regulatory pressure and expansionary monetary policy
The situation of highly indebted real estate developers in China has come to a head. The rating of Evergrande, the largest company affected, was upgraded to "default" by Fitch in early December downgraded after the grace period for a coupon payment due had expired. "Authorities are still trying to let air out of the bloated real estate sector through regulatory pressure, while supporting the broad domestic economy through more expansionary monetary policy. Whether this balancing act will succeed remains to be seen", according to the experts.
The crisis has led to a decline in construction activity and recently even in residential property prices, which could ensure continued weakness in domestic consumption and investment. Foreign trade is likely to continue to provide the greatest impetus for growth in 2022. Global demand is humming, capacity constraints are easing and Chinese exports should carry the surprisingly good momentum of the second half of 2021 into the new year. It is worth noting that the good export performance was not primarily driven by rising prices and base effects, but rather by increasing volumes. Despite the positive industrial cycle, momentum could be dampened at the beginning of the year. In addition to the latent pandemic risks, there is still a threat of a temporary decline in production as the authorities seek to curb air pollution during the Olympic Games, according to Swiss Life's economists.
Bucking the trend in other emerging markets, the central bank eased monetary policy in December by lowering the reserve ratio for banks to 11.5% from 12.0%. Moderate inflation allows further easing. Inflation rose from 1.5% to 2.3% in November due to base effects, but is expected to average just 1.9% in 2022.