We forecast global GDP growth of 4% on average in 2022, slightly less than the consensus (4.4%). But what counts most is nominal GDP growth as it is the main determinant of EPS growth, which should be stronger (8 to 9%).
We consider that, even if growth normalises gradually, there is still some catch-up potential: at the end of 2021, real global GDP is still about 2% below the pre-Covid pace, especially with regards to services, Europe and emerging markets. Both households and companies boast an overall good financial situation, with further potential from reducing the savings rate. There is also some post-Covid catch-up potential from industry restocking and expansion of some services activities (e.g. tourism and transport).
We should obviously be aware that there are still some obstacles to growth, such as persistent bottlenecks (although they are expected to improve gradually, provided East Asia is not hit again by the pandemic) and companies are struggling to recruit. We should also remember that energy prices will very likely remain high. Nor should we forget that China’s slowdown is partly intentional as the authorities wish to purge property sector excesses.
But overall, while GDP growth should be more moderate in 2022 than in 2021, the gradual normalisation of supply vs demand should lead to a sounder growth/inflation mix.
What about exogenous factors?
With regards to the pandemic situation, despite the fifth wave, which is primarily raging in Europe and the emergence of the Omicron variant, the months ahead will see a major vaccination rollout in the emerging world (and of the third dose in advanced countries, greater seroprevalence, availability of new drugs and vaccination of children).
From a geopolitical standpoint, we also consider that the China-US confrontation and Taiwan risk issues are exaggerated. A radical move by Xi on Taiwan would not be a ‘one way risk’. Overall, comparison with the Cold War period is not justified in our view. In the meantime, we will be watching tensions between the EU and Russia (gas, military presence at the Ukraine border, support of Belarus) as well as between the EU and Turkey, concomitant with the situation of migrants in Europe. Nevertheless, we do not expect this to become a systemic issue in 2022.
However, it has become obvious that the monetary environment is now providing less support to equity markets, which will probably be the main obstacle to indices rising.
While we do not expect a major monetary shock, the current monetary policy situation is a factor of tensions and volatility in the short term.
Regarding the Fed, it is clear in our view that the Fed will carry out tapering faster than expected and start raising policy rates sooner than expected. This is already well priced in by the markets.
Jay Powell has clearly stated that the question of scaling back asset purchases faster than expected in November will be addressed at the December FOMC meeting.
The pace of normalisation appears extremely fast (scaling back of QE, pricing of rates post balance sheet reduction). Bear in mind that in the previous monetary normalisation cycle (2013 to 2018) policy rates were raised more than one year after the end of the asset purchasing programme. However, we must take into account the country’s well-advanced position in the cycle and the fact that financial conditions remain favourable (HY credit spreads, real yields, equities,) despite the dollar upturn of recent months.
Regarding the ECB, the PEPP is coming to an end and there will be further details about QE via the APP after the 16 December Governing Council meeting. But, in general, we consider that there is still significant excess capacity in the eurozone and the situation is different from that of the US, which is more ahead in the cycle. Overall, the current situation in the EU requires a more flexible monetary policy over time than the US.
In the medium term, the main equity market driver will continue to be EPS momentum. In 2021, US EPS should jump 50% vs a consensus of 20% at the beginning of the year (we expected about 40%). There obviously is not as much potential now in view of the past rebound and the expectation that margins should stabilise or widen slightly. However, thanks to still firm nominal growth and share buybacks (thanks to abundant cash flows), EPS growth should near 15% in the US and worldwide in 2022 (vs 8% consensus for the S&P500 and 7% for the MSCI W AC), and probably just over for Europe and emerging markets.
Jean-Pierre Petit is CEO of Les Cahiers Verts de l’Economie-