Outlook 2022 – Q1

The past year was unusual and at times confusing for investors on every level. Following the economic shock of the COVID-19 pandemic, economic growth declined sharply in 2020 before experiencing an extraordinary recovery in 2021, notably on account of the implementation of historic fiscal plans and monetary support.

The amplitude of the phases of the current economic cycle, the speed of their succession and the exogenous elements grafted onto them created an uncertain and volatile environment. By contrast, these movements supported risky assets. In this way, the consequences linked to the emergence of new variants, major disruptions in supply chains and massive injections of liquidity make economic forecasting more difficult than during normal periods. Having said this, the distinct phases of the economic cycles have helped us to see more clearly.

In summary, if 2020 was the year of economic contraction and 2021 the year of recovery, 2022 should be the year of normalisation.

A year dominated by inflation?

Since April, Jerome Powell has described the significant rise in inflation as transitory, albeit without giving us any time frame. The head of the Fed sees this rise as having a cyclical source, which should gradually fade.

This is the complete opposite of a well-established structural inflation, the effects of which would be much more negative than the inflationary surge that we have been experiencing for several quarters. The debate has nevertheless started to take hold, since the term “transitory” can be interpreted as giving an indication of a rapid reversal of the trend. Structural inflation is a situation caused by a significant change in the structure of the economic system.

This is much more complicated to contain and more threatening than a transitory price rise due to a temporary increase in demand, reinforced by bottlenecks in supply chains caused by health measures. Indeed, what investors fear is the inflation experienced by the US in the 1970s and 1980s or that experienced by developing countries.

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