This year will start with a whimper as headwinds, the coronavirus omicron variant included, weigh on growth. As the months pass by, these headwinds will likely abate, and I expect 2022 to end with a bang. From an investment perspective, I would characterize the year as tactical bear, structural bull.
Let's start with the structural story: Why do I hold a bullish view? When I observe the global economy, I see a large amount of pent‑up demand, especially outside the U.S., and output gaps that are still open. Financial conditions remain very accommodative, and, following a decade of deleveraging and recent fiscal largesse, private sector balance sheets are strong. The fly in the ointment is inflation, which has surged much above most peoples' expectations—and even above the expectations of those who say they always knew inflation was just around the corner. Consequently, this is an economy where, virus outbreak permitting, private demand can accelerate substantially.
The pickup in private demand will likely be supported by easy financial conditions and strong private sector balance sheets. The still‑open output gaps ensure that, although monetary accommodation is being removed, there is no need for policymakers to shift to a pace of tightening that threatens the business cycle expansion. However, as the year progresses and residual output gaps close, monetary policymakers will likely become increasingly assertive in their quest to tighten monetary policy.
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