Then there is increasing global vaccination, conviction current strong inflationary pressures will prove transitory and hopes central banks will not be distracted from achieving long-held targets around prices and employment and therefore continue with very accommodative monetary settings for some time.”īut behold, Omicron and Russia’s invasion of Ukraine and zero COVID tolerance in China have turned financial markets upside down in the six months to 30 June 2022. This in part reflects several factors, chief among them the economic recovery and optimism it will continue. One year ago, in Forecast 2021–22 published on 8 July 2021 I said “So far, 2021 has been a record-breaking year on many fronts. Rallies are likely, reflecting mood swings but there is no room for complacency. Either way, the near-term outlook for equity markets is not overly encouraging. The nightmare scenario would be stagflation, where central banks do not kill growth, but inflation escapes unscathed. A growing body of opinion believes rates may need to be cut again in 2023 as economic growth slides.īringing inflation under control will probably require a meaningful contraction in economic activity. After months behind the ball belated heavy-handed action is raising fears of a recession next year. Elevated inflation is a likely passenger for most of 2022 and negative real interest rates should be reversed as a priority.”Ĭentral banks are now talking tough.
In Forecast 2022 published on 16 December 2021, I wrote, “As 2022 dawns, it’s time for the Federal Reserve (the Fed) to stop protecting equities markets and encouraging risk taking.
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