about 2 years ago • 3 mins
Economists have high hopes for the global economy in 2022, but a lot rides on whether central banks serve something up that’s too hot, too cold, or just right.
What does this mean?
Economists reckon the “real” – that is, inflation-adjusted – global economy will grow by 4.4%, driven primarily by the US, Europe, and China’s respective 3.9%, 4.2%, and 5.3%. But there’s a catch: that growth – motivated primarily by a recovery in consumer spending and a declogging of supply bottlenecks – could continue to push up prices, which is why economists are expecting inflation to hit 3.5% around the world next year. That might encourage the Federal Reserve (the Fed) to hike interest rates as soon as mid-2022, even if the European Central Bank (ECB) has said it’s not planning to do the same until at least 2024. But if inflation keeps bearing down on the region, it might be forced to change that position pronto…
Why should I care?
For markets: What’s a central bank to do?
The Fed is in a pickle: if the central bank makes borrowing more expensive by raising rates, it risks limiting economic growth as much as it does inflation. American shoppers only have so much cash to spend, after all, and they’re likely to buy fewer nice-to-haves if they’re confronted with expensive price tags. The Fed, then, needs to time its rate rises perfectly next year to enjoy the best of both worlds.
The bigger picture: Put down the dollar.
Goldman Sachs is expecting non-US stocks to do well next year, which doesn’t bode especially well for the US dollar. A wider choice of potential winners could encourage investors to sell their dollar-denominated American stocks in favor of those denominated in foreign currencies, which would push down the former’s currency versus others around the world.
Keep reading for our next story...
Stocks could be set for another strong year in 2022, even if company valuations end up going nowhere fast.
What does this mean?
The key US and European stock indexes – the S&P 500 and the Stoxx 600 – climbed 30% and 22% respectively this year. And Goldman Sachs thinks both will carry that momentum into next year, estimating that the S&P 500 will be 9% higher and the Stoxx 13% higher this time next year.
That’s all well and good, but the investment bank also argues that the S&P 500’s “price-to-earnings ratio” – a key valuation measure – won’t budge much. See, it’s true that shoppers are more likely to be out and about next year, pushing up expectations of companies’ profits and, by extension, their valuations. But it’s also true that any boost this provides could be offset by interest rate hikes, which would make safer investments more appealing at stocks’ expense, in turn lowering stocks' valuations.
Why should I care?
For markets: Is this tech’s swansong?
Analysts still have their reservations about the US stock market, mostly because just 10 companies – including Apple, Microsoft, and Amazon – are responsible for around 30% of its value. If these stocks were to collapse, then, the entire index could too. This is nothing new, admittedly, and investors have blithely continued to buy their shares for years. But 2022 could finally be the year they fall out of favor…
For you personally: Goldman’s recommendations.
First up, buy into companies – think consumer staples, which sell everyday essentials – that can pass price rises onto their customers without losing them to the competition. Second, avoid those with high workforce costs, since those costs are only going to get higher if wages keep rising. Third, “growth” stocks – those of fast-growing companies – are probably fine, but avoid unprofitable ones, which will be most at risk if interest rates rise.
european central bank
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