Global Leaders Facing Complex, Often Divergent Economic Challenges in 2022
GENEVA, Switzerland – Policy makers the world over will face a complex and often divergent set of economic challenges this year as COVID wanes and other challenges, ranging from inflation to record fiscal debt levels, retake center stage, said participants at the Davos Agenda, a virtual World Economic Forum event held on Friday.
This is the second year in a row that world leaders, policy makers and top corporate executives have been forced by the coronavirus pandemic to forgo an in-person gathering in Davos, Switzerland, and conduct their January meetings via video.
An in-person gathering is planned for the summer depending on the status of the omicron or subsequent variant of the coronavirus.
Reflecting on the global health crisis, Kristalina Georgieva, managing director of the International Monetary Fund, noted how the world’s central banks and other fiscal authorities worked “in a highly coordinated fashion” and may well have prevented the world plunging into another great depression.
“Policy flexibility is critical in 2022 – persistent inflation, record fiscal debt levels and COVID-19 combine to present a complex obstacle course for policy makers,” she said.
Georgieva noted vaccination rates represent a dangerous divergence between countries; more than 86 countries did not meet end-of-year vaccination targets.
She went on to say she expects the economic recovery will continue in 2022, but added a caveat: the recovery is losing momentum amid persistent inflation and record debt levels which now exceed $26 trillion.
Christine Lagarde, president of the European Central Bank, also praised monetary and fiscal authorities for how they responded to the pandemic.
“In Europe, so far, we are not seeing inflationary pressure spiral out of control. We see wages and energy prices stabilizing from the middle of the year as bottlenecks reduce and wage inflation normalizes,” she said.
She added: “In Europe we are unlikely to see the kind of inflation increases that the U.S. is experiencing; demand and employment participation are only just returning to the pre-pandemic levels.” She stressed that “Europe is stronger and more united than it was before the pandemic and we will act if we need to.”
Paulo Guedes, minister of Economy of Brazil, said in the same release his country’s economy is bouncing back strongly and economic output is already above the pre-pandemic level.
But he was less optimistic about inflation. “Central Bankers are asleep at the wheel – inflation will be a persistent problem for the western world. Inflationary pressures will not be transitory.”
In the closing session of the virtual Davos Agenda 2022, US Treasury Secretary Janet Yellen expressed optimism about the US economic recovery, outlining the Biden administration’s strategy to promote growth and address long-standing structural issues relating to income inequality, racial disparities and climate change.
“I am confident that we can beat this pandemic and move decisively down the path towards a more prosperous future,” she said.
Yellen noted that aggregate growth has been rapid and that real GDP growth for 2021 was projected at 5.3% in 2021, while a recent Blue Chip forecast put 2022 growth at 3.3%.
She added that the US labor market was exceptionally strong, with 6 million jobs added last year, the unemployment rate is again below 4% and household and firm balance sheets are even healthier than before the pandemic.
“To date, we have not seen large or persistent increases in long-term unemployment, indebtedness, evictions, or bankruptcies. This contrasts with the aftermath of the global financial crisis,” she said.
Yellen went on to outline the administration’s economic growth strategy, which focuses on modern supply-side economics. This approach, she said, prioritizes labor supply, human capital, public infrastructure, R&D and investments in a sustainable environment. These focus areas are all aimed at increasing economic growth and addressing longer-term structural problems, particularly inequality.
“A country’s long-term growth potential depends on the size of its labor force, the productivity of its workers, the renewability of its resources, and the stability of its political systems,” she said. “Modern supply-side economics seeks to spur economic growth by both boosting labor supply and raising productivity, while reducing inequality and environmental damage. Essentially, we aren’t just focused on achieving a high topline growth number that is unsustainable – we are instead aiming for growth that is inclusive and green.”
Speaking separately to the US Conference of Mayors 90th winter meeting in downtown Washington this week, Treasury Secretary Yellen told the gathering President Joe Biden’s $1.9 trillion American Rescue Plan “acted like a vaccine for the American economy, protecting our recovery from the possibility of new variants.”
But she went on to note that the protection “wasn’t complete” and that she expected inflation to remain on people’s minds for the rest of the year.
“But if we’re successful in controlling the pandemic, I expect inflation to diminish over the course of the year and hopefully revert to normal levels by the end of the year around 2%,” she said.