Column: Nowhere near ‘New Normal’ – whatever that is

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Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, USA on January 6, 2022. REUTERS / Brendan McDermid

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LONDON, Jan 7 (Reuters) – Bet how a post-COVID-19 world might play out, but the global economy is still far from normal at the start of 2022.

As after the global bank crash 13 years ago, economists and investment managers are quick to speculate about the “new normal” that will emerge after the end of the pandemic.

The term, which was coined after the First World War and is used to describe the changed conditions after global crises, aims to capture what has survived from the explosion in order to forge a new status quo.

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The new normal after 2008 meant that the world economy had leveled off in a decade of below average growth and no inflation. Low interest rates and central bank incentives drove asset prices up and dampened market volatility – but stagnant real wages fueled simmering political discontent.

COVID-19 has shifted political priorities, placated some of those angry voters, and turned global supply chain dynamics and even geopolitics upside down. Some economists predict “roaring twenties” of real wage growth, but also higher inflation, rising borrowing costs and more economic volatility.

There is no doubt that we are seeing high rates of growth and inflation right now as economies restart and some pandemic policy aid ceases.

But is that really a new normal?

With the introduction of vaccines and the overcoming of supply bottlenecks, this should be the year the dust settles and the true state of the world economy becomes clear.

But even at the beginning of 2022, the ongoing distortions in trade, labor markets, retail prices and spending and saving habits still make it impossible to assess the fundamentals.

The explosion of the Omicron variant of the coronavirus at the turn of the year – albeit confirmed as milder – continues to blur the picture.

Divergent responses from major economies to this latest wave – from Britain’s “ride it out” approach to China’s draconian “zero COVID” lockdowns – are complicating the overall effect.

Investor outlook for 2022 remained largely bullish on income stocks, reflecting an insistent preference for a rotation into cyclical tech stocks and an ubiquitous caution about low-yielding bonds.

But this week’s shaky equity markets due to another restrictive turn by the US Federal Reserve underscores that confidence is shaking in another record year and investors are advising investors to stay on the bandwagon rather than embark on a new path.

Economic indices compared to world stocks and bonds
G7 inflation expectations captured by break-even rates between nominal and inflation-linked bond yields

NOISE AND SIGNALS

Jason Draho, Head of Asset Allocation Americas at UBS Global Wealth Management, advised people to brace themselves for economic data, lower returns and more volatility, especially as Omicron-related biases have not yet emerged.

“The market may not see through this economic noise, but it is,” he said, adding that growth and inflation numbers are likely to deteriorate in the first two months.

“There are several plausible paths the economy could take in the next 12 months, and the right investment playbook can vary quite widely between them.”

This unease about when the COVID coast will dissolve and what equilibrium might emerge is widespread.

“A unique coincidence of events – the restart, new strains of the virus, supply-driven inflation and new central bank frameworks – creates confusion as there are no historical parallels,” wrote BlackRock strategists. The unusually wide range of results means they claim to have “trimmed” risk taking.

And that’s before you get to domestic issues – UK Brexit, French and Italian presidential elections, US midterm elections, China’s push for “shared prosperity” and problems in the real estate sector, and the impact of Russia’s energy price conflict with some of its neighbors.

“We are certainly not in a new normal … we have to leave Brexit behind,” said Catherine McGuinness, Head of London Politics, this week, adding that the pandemic is affecting the UK’s impact of leaving the European Union Disguise the financial industry.

Central banks appear confident enough of the landscape to take back critical care. The Bank of England became the first G7 central bank to hike rates since the pandemic last month, and the Fed is curbing bond purchases and curbing upcoming rate hikes.

But the fear of persistent, if still distorted, inflation spikes may be more of a motivation for them than the belief in a return to normalcy.

As became clear again this week, the markets could simply be aping the policymakers’ game books rather than making independent valuations. Although overall growth is still increasing, the annualized growth in world money supply and central bank liquidity is slowing sharply.

If central banks fear inflation has hardened, they could stop the whole show.

And yet, despite – or perhaps partly because of – its greater restriction, the Fed sees inflation returning to 2% over its forecast horizon this week. The New York Fed’s new analysis of historical biases in the supply chain also suggests that these may be nearing their peak. Continue reading

The “new normal”, it seems, is still to be won.

Household savings interest in the USA / Great Britain / Germany / Eurozone

The author is the editor of finance and markets for Reuters News. All views expressed here are his own.

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By Mike Dolan, Twitter: @reutersMikeD Edited by Catherine Evans

Our standards: The Thomson Reuters Trust Principles.


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