2022 does not look to be a simple year in the economic field. Adding to international trends in public spending, inflation and shortages is a new strain of Covid and the local circumstance that further clouds the outlook.
The economic stimulus applied in various latitudes to address the brake caused by the pandemic is beginning to cause complications. Public spending in various developed economies expanded at unexpected rates in an extremely short period of time. For example, total government spending in the US went from representing 35 to 45% of GDP in 2020. The same situation occurred in Germany, Canada and the United Kingdom.
The application of such a stimulus in such a short period has led to a growth in consumption and a rapid recovery in production, albeit in an environment of scarcity caused by the impact on supply chains. Likewise, there have been phenomena of supply and demand over-adjustment in some markets, which have favored an environment of volatility and price increases.
The situation is complicated by the role that China plays in the global environment. For years that country has shown a broad appetite for the consumption of raw materials, notably metals. Added to this is a growing demand for energy, necessary for economic recovery, which has led it to significantly increase the demand for coal and natural gas. This fact generated a significant increase in gas prices in Europe.
In addition, China has a growing role in commodity markets, due to the development of spot markets and the creation of financial markets associated with international trade. Their futures markets are just as important, in economic value, to the US markets, yet they represent six times as many contracts. This is undoubtedly favorable for the efficient functioning of the markets, but in the short term it can introduce more imbalances, as the participants learn to operate with the new rules.
In recent months there has been a recovery in the price of oil, whereby the Brent variety is expected to stabilize around $ 80. However, there is concern about a drop in investment, caused by investors’ desire to migrate to new business models. Analysts speak of a dysfunctional energy markets, since on the one hand there are blackouts or coal shortages, and on the other the producers are not reacting by making the necessary investments. The message of decarbonization for environmental reasons, put into practice, could mean a shortage of various products, including natural gas, which would affect the production of electricity.
These elements and the emergence of the Omicron variant have set off warning signs, particularly in the US, where a tightening of fiscal and monetary policies is anticipated, as well as a slowdown in the infrastructure development plan, as well as social programs.
Just a few days ago Jerome Powell, in an appearance in the US Senate, in a confusing explanation, pointed out that the word “transitory” should probably be abandoned when referring to inflation. The markets have interpreted that the US will face a difficult outlook to reduce inflation, which in annualized terms stands at 6.2%.
The FED meeting on December 14-15 will surely confirm that the US will apply a rate hike, which will impact peripheral countries.
This change will most likely lead to an upward adjustment in interest rates in Mexico, where we also face an inflation rate that may exceed 7%. The scope for action is narrow and the adoption of alternative measures, in a complex and changing scenario, could be costly. Let’s hope that prudence prevails.
* Consultant for Ockham Economic Consulting, specialized in economic competition and regulation and university professor.
Competition and Markets
Consultant in Economic Competition and Regulation, he is also a university professor.