Will the global economy recover from the pandemic in 2022?

A man in a mask walks past the Bank of England in London

(Image credit: Tolga Akmen/AFP/Getty Images)

published 5 January 2022

Muhammad Ali Nasir, Associate Professor in Economics and Finance at the University of Huddersfield, on the key world economy factors to watch closely

Will 2022 be the year where the world economy recovers from the pandemic? That’s the big question on everyone’s lips as the festive break comes to an end.

One complicating factor is that most of the latest major forecasts were published in the weeks before the Omicron variant swept the world. At that time, the mood was that recovery was indeed around the corner, with the International Monetary Fund (IMF) projecting 4.9% growth in 2022 and the Organisation for Economic Co-operation and Development (OECD) projecting 4.5%. These numbers are lower than the circa 5% to 6% global growth expected to have been achieved in 2021, but that represents the inevitable rebound from reopening after the pandemic lows of 2020.

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Yet the fact that the new variant seems milder than originally feared is likely to mean that restrictions are lifted more quickly and that the economic effect is more moderate than it might have been. Israel and Australia, for example, are already loosening restrictions despite high case numbers. At the same time, however, until the West tackles very low vaccination rates in some parts of the world, don’t be surprised if another new variant brings further damage to both public health and the world economy.

So far, the European Central Bank (ECB), Federal Reserve and Bank of Japan have all abstained from raising interest rates from their very low levels. The Bank of England, on the other hand, followed the IMF’s advice and raised rates from 0.1% to 0.25% in December. This is too little to curb inflation or do any good besides increase the cost of borrowing for firms and to raise mortgage payments for households. That said, the markets are betting that more UK rate rises will follow, and that the Fed will also start raising rates in the spring.

Of course, the real question is what these central banks do in practice. Ending QE and raising interest rates will undoubtedly hamper the recovery – the CEBR forecast, for example, assumes that it will see bond, stock and property markets falling by 10% to 25% in 2022. It will be interesting to see whether the prospect of such upheaval forces the Fed and Bank of England to get more dovish again – particularly when you factor in the continued uncertainty around Covid.

Whatever happens politically, it is clear that Asia will be very important for growth prospects in 2022. Major economies such as the UK, Japan and the eurozone were all still smaller than before the pandemic as recently as the third quarter of 2021, the latest data available. The only major developed economy that has already recovered its losses and regained its pre-Covid size is the United States.

On the other hand, China has managed the pandemic well – albeit with strict control measures – and its economy has achieved strong growth since the second quarter of 2020. It has been struggling with a heavily over-indebted property market, but appears to have handled these problems relatively smoothly. Though the jury is out on the extent to which China’s debt problems will be a drag in 2022, some such as Morgan Stanley argue that strong exports, accommodative monetary and fiscal policies, relief for real estate sector and a slightly more relaxed approach to carbon reduction point to a decent performance.