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Welcome to the first commentary of 2022 – As we enter the Year of the Tiger there are a few themes that look likely to stick with us for a while...

Posted: 26th January 2022   |   Share

By Sarah Ryman

Tiger

Inflation is a stubborn challenge, with surging prices across major economies. Rising levels will create economic pressure going forward, and the recovery is far from becoming established with new variants of Covid-19 impacting Gross Domestic Product near and far. 

 

As a result, we have seen companies raise more than $100bn on the bond market in the first week of 2022 as companies try to lock in borrowing costs before benchmark interest rates climb.

Unemployment has not been as badly hit as some economists had forecast, with the UK and US around 4% and Europe just over 7%.  In the UK, the bigger concern is staff shortages in a number of sectors, and so headline numbers in the UK are expected to remain low despite the end of the furlough scheme.  Hospitality and travel sectors remain the exception as the hardest-hit but with COVID travel tests being reduced and or scrapped holiday bookings are on the up.

UK

Perhaps unsurprisingly, the UK government is on track to report a significant budget deficit of £183bn in the financial year to end March ’22 but this is a substantial reduction from the peacetime record of £320bn in 2020 – 2021.  The cost of living in Britain has swelled to its highest level in three decades (inflation is now up at 5.4%) and as a result, the Bank of England is expected to try to manage through as many as four rate hikes this year taking the base rate to 1.25% by year end.  The Consumer Price Index measure remains well above the central bank’s inflation target of 2% and key influencers were housing and transport. 

Economic output has technically exceeded pre-pandemic levels for the first time, with November’s reading of GDP rising 0.9%, predominantly lead by growth in construction prior to Omicron impacting.  The FTSE 100 has also broken the 7,600 mark for the first time since January 2020 - but will the traction be maintained?  The International Monetary fund has said that the UK will grow more slowly now, forecasting 4.7% instead of 5% in their latest world economic outlook report. 

EUR

Eurozone inflation has hit a record high of 5% in November, according to official data released this month.  Key influencers have been higher gas, electricity, food bills and surging cost of imported goods within the 19 countries that share the single currency. 

US

The Fed has warned that given the inflationary pressures they may need to raise interest rates “sooner or at a faster pace” than officials had initially anticipated, as the central bank seeks to tame soaring inflation, according to minutes from its latest meeting.  Subsequently Patrick Harker, the president of the Philadelphia branch of the Federal Reserve said he would support more than three interest rate rises this year. In an interview with the Financial Times, he said: “I currently have three increases in for this year, and I’d be very open to starting in March,” and “I’d be open to more if that’s required”.  Meanwhile with consumer prices rising at the fastest pace in three decades, Biden has commented that controlling inflation is a “top priority”.  December’s 7% rise in CPI (YoY) confirmed the necessity for the Fed to take action as this reading denotes the fastest pace in almost four decades.  Retail sales in the country have suffered their largest drop in 10 months as rising prices and supply chain challenges continue to impact alongside a diminishing consumer sentiment. 

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