It was encouraging last week to see U.S. investment bank JP Morgan predict that 2022 will mark the end of the coronavirus pandemic and see a full global economic recovery.
It may seem like a long way off at the moment, with Omicron cases increasing rapidly. But the bank’s outlook report for the coming year said new vaccines and treatments would lead to a “strong cyclical recovery, a return to global mobility and a release of pent-up consumer demand.”
While everyone is hoping this prediction comes true, there is obviously some apprehension among companies given the strong headwinds they are currently facing. When businesses talk about what to expect in 2022, three key issues dominate: inflation, supply chains and labor shortages.
There has been a lot of attention recently on the prospect of higher inflation on the horizon. Indeed, prices according to the Consumer Price Index (CPI) rose for much of 2021 – and hit a 10-year high of 5.1% in November.
Several factors are responsible, but rising global commodity prices, supply constraints and surges in demand as restrictions have been lifted have all put upward pressure on inflation. In addition, the composition of spending during the pandemic has changed dramatically, with consumers spending far more on goods and less on services – a trend that has yet to fully reverse. Unfortunately, in some cases, the additional demand pressure on goods is offset by supply constraints in the global manufacturing sector, resulting in a “double whammy” on prices.
No doubt the peak of inflation has not yet been reached. A potential energy price cap in the UK in April 2022 could have an additional impact on prices, while global commodity prices and supply chain disruption are also expected to continue to exert pressure on prices. the increase on this index in 2022.
There are also concerns about the impact on energy-intensive sectors affected by the recent surge in gas prices – both through direct cost increases, as well as spillover effects. For example, in the fall of this year, high energy costs threatened to shut down a UK-based ammonia plant. The factory was, however, a major supplier of carbon dioxide to the UK food industry; a government support program was therefore needed to ensure the continued production and supply of this essential ingredient – at least until January 2022.
In addition, many companies also face higher salary agreements for specific roles where skills are scarce (eg, truck drivers). The job market remains incredibly tight, with vacancies at record highs across the UK. There is also growing concern that disruptions caused by Omicron will affect absenteeism levels as the new year approaches, which would again impact production and supply chains. Overall, Omicron’s impact on consumer demand and spending is also unknown and adds further uncertainty to the economic outlook.
The Bank of England believes, however, that many of the inflationary pressures are temporary. He argues that global progress in tackling the pandemic should mean that supply chain disruptions will ease. Demand should also return to more normal levels and the distribution of goods / services should eventually rebalance.
But one must also consider the extent to which the recent rise in inflation is rooted in more underlying price pressures (especially inflation expectations and wage negotiations). With a plethora of rising costs to businesses, many companies are reporting that higher prices will have to be passed on to customers. Indeed, household expectations of future inflation have risen in the BoE’s own survey, but remain relatively low nonetheless. The bank’s best judgment at this point is that inflation expectations remain anchored at the 2% target. Let’s see!
In the coming months, the Bank of England will closely monitor inflation expectations, wages and the degree of spare capacity in the economy. Having spare capacity makes it easier to increase production without incurring higher costs. The modest interest rate hike announced last Thursday should reassure businesses that the Bank is keeping a watchful eye on the matter and is ready to act to tighten monetary policy if necessary.
In summary, there are significant headwinds and uncertainties for the year ahead, but we must remember that the underlying fundamentals for growth remain strong. Going forward, the economy is expected to be supported by strong household and corporate balance sheets, which boost consumer spending and investment, further aided by a strong labor market.
However, other challenges will persist in the medium term: higher inflation will eat away at real profits, business investment will require support after the government’s super-deduction is over, and exports will lag considerably. With productivity only returning to its anemic pre-Covid trend and GDP seeing scars from the pandemic, it is clear that longer-term challenges have yet to be addressed.
:: Angela McGowan is Director of CBI Northern Ireland