The ECCT hosted a Special Lunch on the economic outlook for 2022 featuring guest speaker Tony MC Phoo, Senior Economist for Standard Chartered Bank Taiwan. The speaker gave a presentation titled “Still battling headwinds”, providing some insights from his bank’s recent research.

The economic outlook for 2022 is positive and most markets are pricing in an improved global recovery. Global industrial production and exports have recovered at a much faster rate than they did following the 2008-2009 global financial crisis. However, the recovery will be a multi-speed one as there is likely to be a marked difference between the performance of developed markets and emerging markets, especially those developing markets with poor fundamentals. This will continue the trend over the past year, which has seen a strong recovery in developed markets. Much has to do with the ongoing coronavirus pandemic situation. In particular, countries that have had slow Covid-19 vaccine roll-outs will struggle to recover.

Inflation is rising rapidly in developed markets and is expected to remain elevated even if the Covid-19 situation improves. According to Phoo, supply chain disruptions and shipping capacity is curbing supply. Shipping costs from China have been rising faster than those to China partly because of frequent disruptions to production and logistics in China on account of the country’s zero Covid tolerance policies. This is also putting pressure on commodity prices. Inflation increases the risk of aggressive monetary policy tightening by central banks and Standard Chartered’s research indicates that markets have priced in an aggressive rate-hiking cycle in 2022 for developed market central banks amid elevated inflation. Phoo said that Standard Chartered expects two rate hikes by the US Federal Reserve (the Fed) in the first half of 2022 and a pause thereafter but other analysts are predicting as many as four hikes in 2022. In addition, the Fed has announced a taper of asset purchases from November and the European Central Bank’s Pandemic Emergency Purchase Programme (PEPP) is likely to end by March.

There is a risk of potential financial stress due to higher leverage as a result of expanding debt but fiscal support is expected to be reduced in 2022. Following generous handouts in 2021, almost all governments are looking to tighten their fiscal belts over the next two years, according to Phoo.

Turning to the US, Standard Chartered sees an improving growth outlook following the strong recovery in 2021. However, rising core inflation is a major concern.

China, on the other hand, offers more predictability. According to Phoo, this is because Chinese authorities want to maintain stability ahead of important activities this year, especially the 20^th Chinese Communist Party Congress, to be held in the second half of the year. Projects under the 14^th five-year plan, which began last year, will continue to be rolled out in 2022 and help to keep the economy ticking over. While consumption remains subdued due to strict pandemic control measures in place, the government is expected to spend liberally to pick up the slack. Standard Chartered expects a budget deficit of 5.5% of GDP and the government could even spend up to 6% of GDP to allow tax/fee cuts while maintaining robust spending on infrastructure. All in all, Standard Chartered expects supportive policies to bring China’s GDP growth to 5-6%, in line with mainstream estimates. The People’s Bank of China is not likely to raise interest rates until 2023 and not until it sees the gap between Chinese and US interest rates getting too narrow.

Turning to Taiwan, while headline numbers are good, the pandemic appears to be under control and vaccination rates are rising, Phoo sees speedbumps ahead. Firstly, if strict border controls are maintained, it will be another tough year for the travel and tourism industry. Secondly, Taiwan’s economy remains heavily dependent on trade. While this has provided a strong boost to the economy over the past 18 months, momentum is likely to slow in 2022. According to Phoo, export orders for technology products are already slowing and leading indicators in the US also back this up. Thirdly, investment spending is unlikely to remain as robust as it was in 2021, when it was spurred by US-China tensions and supply chain diversification. While these trends are expected to continue, the reasons are more complicated. Phoo cited a survey his bank conducted last year on its clients with investments in China to note that while they are not so much divesting from China as investing in other countries as a way to diversify production to other countries. Their motivation is both to hedge their bets by investing in US-friendly countries as well as getting a foothold in new markets. Another possible constraint to Taiwan’s economic development will be if infrastructure needs are not able to meet the needs of industry. In particular, electricity supply may not be sufficient to meet demand.

Phoo noted that the employment outlook has improved and consumer confidence and spending picked up in the fourth quarter of 2021 due to a stable Covid-19 situation. Moreover, inflation in Taiwan is quite stable compared to other developed markets. Given that inflation is driven by food and transport prices, and Standard Chartered expects oil prices to ease in 2022, inflation in Taiwan should ease in the second half of 2022.

Phoo concluded that the pandemic remains the biggest risk factor to the global economic outlook. Whether the pandemic situation improves or deteriorates in specific economies will have a major impact on their future trajectories.