Economic recovery

Which way to recovery? 2022 will be an important transition year for a global growth cycle largely shaped by the pandemic. Global economic growth is expected to slow down, but even with that downshift the global economy should easily outpace the annual average.

Top economists are expecting consumer lead strength in the United States to serve as the global catalyst through the first half of 2020. The U.S. growth pace should remain solid as support to manufacturing will shift from catch up spending to inventory restocking. There will likely be economic shortages which will keep inflation elevated before supply chain pressures ease and allow inflation to subside during the year’s second half.

Further and persistent Covid outbreaks could definitely slow economic growth. Virus fears could keep workers at home longer and delay the recovery in spending on services. The longer Covid interruptions and supply chain disruptions continue, wage and rent gains would have a higher probability of generating persistent inflation as there are so many less people in the workforce. There’s a lot of speculation as to what is keeping people out of the labor force – could be a lack of child care, the lack of adult care, retirements, or resignations.

Much of this outlook hinges on the path of the COVID-19 virus and its propensity to disrupt business activity, however, the consensus within the health community is that the latest variant, Omicron, is likely to peak over the next several weeks and then drop rapidly. If that does happen, the surge in Omicron will have what is mainly a temporary effect, impacting in-person businesses such as restaurants, entertainment and air travel the most. This impact, while temporary, could persist over several months and have ramifications in these business sectors.

The economy did rebound rather quickly from the initial pandemic recession in March 2020. GDP growth during the fourth quarter of 2021 stood at 7%, while annual growth was measured at 5.5%. GDP growth during the first quarter of 2022 is projected to grow about 2% because of the Omicron effect, but should post an average gain of 4% by the end of the year. Employment has not reached pre-pandemic levels, but the numbers aren’t that bad. The economy in 2021 added an average of 500,000 new jobs per month nevertheless, overall employment across the country is down 3.6 million, or 2.3%, from February 2020. On the flip side, higher wages, government stimulus payments, and reduced consumer spending during the pandemic helped households accumulate $2.5 trillion in savings, or 15% of the current annual consumption rate. Home and equity values have also risen, increasing household wealth. All this translates to relatively strong spending now and going forward.

But for now, with the supply chain and inventory problems, higher business costs, and government stimulus contributing to higher inflation rates, it’s unclear as to how long inflationary pressures will persist. The Fed is monitoring whether there is a long-term inflation problem, or whether prices will ease once supply chains begin to free up. This month, the Fed also announced it would reduce its asset purchases as the economy recovers. This shows that there is belief that the Omicron surge will not throw off future expansion. I’m optimistic and hoping that the pandemic analysts are correct and that recovery is on its way.