What’s Ahead for Global Economies and Markets in 2022?

Episode Summary

Executive Summary: Goldman Sachs’ 2022 outlook calls for still-strong global growth but a clear slowdown from the reopening rebound, with inflation likely easing only gradually and policy rates rising over time. The discussion highlights regional divergence, persistent supply and labor pressures, a likely Fed hiking cycle beginning around mid-2022, and market volatility as investors adjust to higher rates and a less synchronized global recovery.

Main Topics: Global growth remains strong but slows from 2021 (Priority: 5/5): Jan Hatzius expects global GDP growth of about 4.5% in 2022, below 2021 but still well above trend. He argues reopening gains are fading, fiscal support is turning into a drag, and monetary policy will tighten, though pent-up savings and inventory rebuilding should help sustain growth. Regional and country divergences (Priority: 4/5): The outlook is relatively balanced for advanced economies, with a mild preference for the Euro area. In EM, Goldman is more constructive on India, ASEAN, and Russia, but more cautious on China due to property-sector weakness and on Latin America, especially Brazil, due to tight financial conditions and political risk. Inflation likely moderates, but risks remain (Priority: 5/5): Goldman thinks inflation will stay elevated into 2022 but gradually normalize by year-end as goods inflation cools, shipping costs ease, and durable-goods demand softens. The main upside risk is wages, which could force faster policy tightening if sequential wage gains persist. Fed tapering and rate hikes are expected in 2022 (Priority: 5/5): The speakers expect tapering to accelerate and the first Fed hike to come around mid-2022, potentially after taper ends by Q1 if the pace quickens. The broader view is that policy rates will rise gradually over multiple years, reflecting strong growth, labor-market healing, and persistent inflation above target. Markets are only partially pricing the new regime (Priority: 4/5): Dominic Wilson says markets have repriced growth optimism and low yields are supported by low real rates and confidence that inflation is temporary. But if inflation proves stickier, equities and traditional stock-bond portfolios could face pressure because bonds would no longer hedge risk as effectively. Long-term rates should move higher (Priority: 4/5): Goldman argues that terminal policy rates and neutral rates are being underestimated by markets. Greater public-sector capital needs, climate spending, infrastructure investment, and higher post-pandemic inflation should push yields higher over time, though likely through a gradual process rather than a sudden shock. Risks center on Omicron, inflation, and policy volatility (Priority: 4/5): Near-term downside risk comes from Omicron and other health disruptions, while the medium-term concern is a more persistent inflation-and-wage spiral. Market participants also face political risk from elections in Brazil, France, and the U.S. midterms, plus uncertainty over how far central banks can tighten without derailing growth.

Key Arguments: 2022 is not a recessionary or crisis year; it is a normalization year with slower but still-above-trend global growth. The biggest reopening boost is behind us, so growth will decelerate even if activity remains solid. Household excess savings and inventory rebuilding should partially offset the withdrawal of fiscal support. Inflation should cool as goods-sector pressures ease and demand shifts away from durable goods, but wages are the key upside risk. The Fed is likely to begin hiking around mid-2022 because growth, labor markets, and inflation all point in that direction. Market pricing for terminal rates is too low; policy rates and long yields should end higher than investors currently expect. A persistent inflation regime would be challenging for equities and especially for balanced portfolios because bond protection would weaken. China remains a growth drag because of property-market weakness and policy priorities that are less focused on near-term GDP growth. EM performance will be more differentiated than DM, with commodity exporters and reopening economies better positioned than politically or financially stressed countries. The bond market’s current low yields reflect both low real rates and skepticism that tightening can last; rates may rise gradually as the market gains confidence that higher policy rates are sustainable.

Data Points: Global growth forecast for 2022: 4.5% - Jan Hatzius’ estimate for global GDP growth next year Global growth in 2021: about 6% - How Goldman expected 2021 growth to come in Strongest pace of growth in cycle: around Q2 2021 - Jan’s estimate of when the cycle peaked Fed taper pace under discussion: $15 billion per month vs. potentially $30 billion per month - Potential acceleration of tapering Possible end of tapering: as early as end of Q1 2022 - If tapering is accelerated First Fed rate hike timing: around June 2022 / middle of 2022 - Goldman’s base case for the first hike Expected terminal federal funds rate: 2.25%–2.5% - Goldman’s longer-run expectation for the U.S. policy rate Market pricing for U.S. terminal rate: a little over 1.5% - Dominic’s description of current market pricing Rate gap versus market: about 100 basis points higher - Goldman’s U.S. terminal-rate view relative to market Euro area rate hikes: not until the second half of 2024 - Goldman’s expectation for ECB tightening timing Inflation target normalization: back close to 2% by end of 2022 - Goldman’s core inflation outlook for the U.S./UK, with Euro area below 2% Inflation above target in 2024: about 50 basis points above pre-pandemic five-year average - Across the roughly 40 economies Goldman covers U.S. labor cost growth: around 4% year-on-year - Current wage growth pace Jan says could still be consistent with 2% inflation Recent sequential wage growth: roughly 5%–6% - Potential upside inflation risk if sustained Omicron downside impact on Q1 growth: about 2.5 percentage points (quarter-on-quarter annualized) - Goldman’s estimated hit if the downside case plays out U.S. unemployment rate: below 4% - Expected by the time the Fed is considering hikes China 2021 growth: close to 8% - Comparison point for slower 2022 growth China 2022 growth forecast: about 4.8% / below 5% - Goldman’s expectation for annual Chinese growth Bond yield example: 30-year bond yield around 2% - Used to illustrate how low yields are despite strong growth and inflation Number of economies covered: about 40 - Jan’s inflation comparison across Goldman’s coverage universe

Pivotal Quotes: "The Long Road to Higher Rates" — Jan Hatzius: Title of Goldman Sachs’ 2022 outlook, capturing the expected gradual rise in policy rates "We still think that we'll ultimately, by the end of next year, get back to something that's not too far from 2%." — Jan Hatzius: On the inflation outlook and expected normalization by end-2022 "If those assumptions don't hold, then you are going to see that the kind of macro environment is less supportive [of] this sort of very high valuation picture." — Dominic Wilson: On the market impact if inflation remains persistently high and yields rise more than expected

Implications: Investors should prepare for stronger growth but a tougher rate environment, with more volatility as markets adjust to higher inflation, tighter policy, and regional divergences. Bonds may offer less protection, while selective opportunities remain in reopening economies and places where policy risk is clearer.