Despite dips and disruptions from new variants of COVID-19, 2021 turned out to be a relatively positive year for economies and markets in most parts of the world. Growth rose above its potential after the severe recession of 2020, and financial markets recovered robustly.
But 2022 may be more difficult. The pandemic is not over. Omicron may not be as virulent as previous variants – particularly in highly vaccinated advanced economies – but it is much more contagious, which means that hospitalisations and deaths will remain high. The resulting uncertainty and risk aversion will suppress demand and exacerbate supply-chain bottlenecks.Together with excess savings, pent-up demand, and loose monetary and fiscal policies, those bottlenecks fuelled inflation in 2021.
The new year also brings mounting geopolitical and systemic risks. On the geopolitical front, there are three major threats to watch.First, Russia is preparing to invade Ukraine, and it remains to be seen whether negotiations on a new regional security regime can prevent escalation of the threat.