World economy will still face credit stress, price pressures, Covid-19 risks in 2022: Fitch Solutions

IN 2022, the world economy will still face several "important" downside risks, namely credit stress from the property sector in China, price pressures and new Covid-19 variants, according to a recently-published report by Fitch Solutions Macro Research.

Although it was published last Wednesday (Nov 24), before the threat of the Omicron variant became evident over the weekend, the research house stated: "We should not discount the risk of new Covid-19 variants, particularly as large sections of the global population remain unvaccinated."

Meanwhile, Fitch Solutions highlighted that credit stress from China's property sector could spread to the wider economy and result in a "sharper" economic slowdown than the world is currently anticipating.

"Combined with the potential for more Covid-19 outbreaks, the sector could even prompt a 'hard landing'," it said.

Rather than easing, price pressures "could remain strong" in the year, it added, prompting a more aggressive tightening cycle, which could lead to a significant re-pricing of markets.

This could in turn spark volatility and depress growth as investors and consumers cut back, particularly in emerging markets, it said.

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Given that inflation will still be above target in many cases, yet another risk could come from abrupt policy adjustments or policy missteps across emerging markets, undermining central bank credibility, it stated.

On the point of interest rate hikes, Fitch Solutions gave the prediction that there would be one interest rate hike in the US, UK, Canada and Australia, about three hikes in Norway and five in New Zealand by the end of 2022.

It is, however, of the opinion that the central banks will be mindful not to hike too aggressively to avoid choking off growth and in view of a recent increase in debt loads.

Still, Fitch Solutions forecast that the global economy will grow by 4.1 per cent in 2022, well above the 3.1 per cent average recorded between 2015 and 2019.

This would, however, amount to a "significant cyclical slowdown", as a 5.5 per cent growth was estimated for 2021, it said.

Above-trend growth will primarily be driven by developed markets, which will grow 3.7 per cent, higher than the pre-pandemic average of 2.2 per cent, it noted.

Growth in these markets will be driven by the continued opening up of the global economy, still-elevated excess savings, tight labour markets, broadly supportive government policy and the slow, but steady, easing of supply chain issues over the course of 2022, it said.

Pointing out that the situation in emerging markets is "slightly more nuanced", it predicts growth there to slow from 6.2 per cent in 2021 to 4.8 per cent in 2022, just slightly above the average of 4.5 per cent during the five years to 2019.

This figure is skewed by the sharp slowdown Fitch Solutions forecast for China, which accounts for about 40 per cent of emerging markets' gross domestic product.

If China is taken out of the equation, emerging markets will grow by an above-trend rate of 4.4 per cent, some 1.3 percentage points higher than their pre-crisis five-year average growth rate of 3.1 per cent, it said.

China's growth should slow from 7.8 per cent in 2021 to 5.4 per cent in 2022, well below the pre-pandemic average of 6.6 per cent, owing to its zero-Covid strategy which will continue to curb consumption growth, among other factors, it added.

Fitch Solutions, meanwhile, noted that tourism will see an uneven recovery in 2022, with demand from Western consumers focusing on short-haul destinations, such as the Caribbean and Southern Europe.

Asian destinations that were dependent on Chinese tourists, namely Thailand and the Philippines, will experience a "slow, multi-year recovery" due to Asia's slower vaccine rollout and tight travel restrictions in China, it said.

Chinese tourists accounted for about 28 per cent of all tourist arrivals in Thailand and 21 per cent in the Philippines in 2019.