Column: Nowhere near the “new normal” – anything: Mike Dolan



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

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LONDON, Jan. 7 (Reuters) – Bet as much as you want on how a post-COVID-19 world might unfold, but the global economy remains far from normalcy as we head into 2022.

As after the global banking crash 13 years ago, economists and investment managers were quick to speculate on the “new normal” that will emerge once the pandemic has passed.

The phrase, coined after World War I and used to describe the change in circumstances following global crises, aims to capture what lingers from the explosion to shape a new status quo.

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The new normal after 2008 saw the global economy settle into a decade of below-normal growth and non-existent inflation. Lower interest rates and central bank stimulus measures have supported asset prices and dampened market volatility, but stagnant real wages have fueled simmering political discontent.

COVID-19 has shifted political priorities, appeasing some of these angry voters and upending global supply chain dynamics and even geopolitics. Some economists predict “roaring twenties” of real wage growth, but also higher inflation, rising borrowing costs and heightened economic volatility.

There is no doubt that we are currently seeing high growth and inflation rates as economies restart and some pandemic policy support is removed.

But is this really a new normal?

With vaccine rollouts and supply bottlenecks, this is supposed to be the year the dust settles and the true state of the global economy becomes clear.

But as we move into 2022, persistent distortions in trade, labor markets, retail prices, and spending and saving patterns mean that fundamentals are still impossible to assess.

The explosion at the turn of the year of the Omicron variant of the coronavirus – even if it is confirmed to be milder – blurs the picture even more.

The different responses of major economies to this latest wave – from the British ‘ride it out’ approach to China’s draconian ‘zero-COVID’ lockdowns – complicate the overall effect.

Investor outlook for 2022 has largely remained with a bullish outlook on earnings-oriented stocks, showing a stubborn preference for rotation to cyclical tech stocks and a pervasive distrust of low-yielding bonds.

But this week’s stock market swing on another hawkish turn from the US Federal Reserve underscores that confidence in another record year is faltering and advice to investors is more to stay on course than to embark on a new way.

Indices of economic surprise compared to global stocks and bonds
G7 inflation expectations, captured by equilibrium rates between nominal bond yields and indexed to inflation


Jason Draho, Head of Asset Allocation Americas at UBS Global Wealth Management, advised people to be prepared for the alarm bells over economic data, lower returns and more volatility, especially as Omicron-related distortions don’t have not yet emerged.

“The market may not look through this economic noise, but it is what it is,” he said, adding that growth and inflation numbers are expected to worsen over the years. first two months.

“There are several plausible paths the economy could take over the next 12 months, and the right investment plan can vary widely between them. “

This unease over when the COVID coastline will emerge and what balance could emerge is widespread.

“A unique confluence of events – the restart, new virus strains, supply-side inflation and new central bank executives – creates confusion because there is no historical parallel,” wrote BlackRock strategists. The unusually wide range of results means they claim to have “reduced” risk-taking.

And that’s before tackling domestic issues – Brexit in the UK, French and Italian presidential elections, midterm elections in the US, China’s push for “common prosperity” and problems in the real estate sector, and the impact on energy prices of Russia’s stalemate with some neighbors.

“We are certainly not in a new normal … we have to put Brexit behind us,” Catherine McGuinness, City of London’s chief policy officer, said this week, adding that the pandemic was obscuring the impact on Britain’s financial sector leaving the European Union.

Central banks appear confident enough in the landscape to roll back intensive care. The Bank of England last month became the first G7 central bank to raise interest rates since the pandemic, and the Fed is cutting bond purchases and slowing upcoming rate hikes.

But anxiety over persistent inflation spikes, even if they are still skewed, may be more of a motivation for them than faith in a return to normalcy.

As was clear again this week, markets could simply emulate the playing field of policymakers rather than making independent valuations. While still growing overall, annualized global money supply and central bank liquidity growth is slowing sharply.

If central banks are worried they’ve let inflation set in, they could stop the whole show.

And yet, despite – or perhaps partly because of – its greatest hawkishness this week, the Fed still sees inflation slipping back to 2% over its forecast horizon. The New York Fed’s new analysis of historic supply chain distortions also estimates these could be near a peak. Read more

The “new normal”, it seems, is still up for grabs.

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Household savings rate in the United States / United Kingdom / Germany / euro area

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

Our Standards: Thomson Reuters Trust Principles.



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