Economic Risk Factors for Next Year... Omicron, US Interest Rate Hikes, Global Political Uncertainty

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Cho Hyun-ui] Although it has been a year since the world began COVID-19 vaccinations, the pandemic continues to threaten the economy. Omicron, first reported in South Africa and designated a 'variant of concern' by the World Health Organization (WHO) just two days later, is spreading at an unprecedented pace, causing the global economy to falter once again.

On the 13th (local time), Bloomberg News identified Omicron and the resulting lockdown measures in various countries as one of the major risks to the economy next year. It is still too early to assess fatality rates and vaccine effectiveness since Omicron emerged less than a month ago, but its transmissibility appears to be significantly stronger than previous variants.

If Omicron proves less deadly, the economy could return to pre-pandemic levels; otherwise, it could deliver a direct blow to the economy. Bloomberg warned, "If a more lethal variant emerges, demand will decrease and supply chain issues will persist. Labor shortages and transportation problems will also continue."

Besides Omicron, Bloomberg News cited inflation concerns, U.S. interest rate hikes, China's Evergrande crisis, global political uncertainties, shifts in fiscal policy stances across countries, and rising food prices as economic risk factors.

Earlier this year, the U.S. had forecast inflation around 2% by year-end, but it actually approached 7%. Bloomberg noted, "A repeat of 2022 could occur. Wages are already rising rapidly. The gas war between Russia and Ukraine is driving gas prices up, and food prices may continue to rise due to climate change."

Regarding the Federal Reserve's interest rate hikes, it predicted that if the benchmark rate reaches 2.5% after three hikes next year, a recession could occur in 2023.

Bloomberg stated, "U.S. rate hikes lead to a stronger dollar and capital outflows, which in turn can trigger currency crises in emerging markets." It forecast that Argentina, South Africa, Turkey, Brazil, and Egypt would be particularly affected.

The report also mentioned the decline in China's growth rate due to the default of real estate company Evergrande. Bloomberg said, "As long as the zero-COVID policy continues, locking down entire regions even if there is only one confirmed case, and with weak demand and blocked funding, the real estate construction sector?which accounts for a quarter of China's economy?will decline, shaking the economy."

Europe's political situation was also identified as a risk factor. Italy is scheduled for a general election in January next year, and France in April. In particular, in France, Republican presidential candidate Val?rie P?cresse has surged, emerging as a strong competitor threatening President Emmanuel Macron.

Bloomberg noted, "So far, European leaders have been united in supporting the European Central Bank's (ECB) monetary policy stance, but with several member states facing elections, such cooperation may no longer exist."

It added, "If skeptical figures about the European Union's strengthening rise to presidency or other key positions in major member states, the European bond market could lose composure, and the ECB may lose political support," warning that "Europe's economy could contract."

The conflict between the UK and the EU over the Northern Ireland Protocol was also mentioned. The Northern Ireland Protocol stipulates that Northern Ireland, part of the UK, remains in the EU market even after the UK's withdrawal from the EU, but the UK is considering refusing to implement it.

Bloomberg said, "Uncertainty over the Northern Ireland Protocol could hinder investment and weaken the pound, which may lead to inflation and a hit to real incomes."

Governments that supported workers and businesses with various subsidies during the pandemic may shift their fiscal policy stance starting next year. The U.S. sharply pivoted from stimulus to tightening from the second quarter of this year, and this trend is expected to continue next year. However, Bloomberg reported that Japan and China are exceptions and are likely to continue stimulus measures.

Food prices, which surged due to climate change and the pandemic, are expected to continue rising next year. Bloomberg explained, "The 2011 food price surge triggered popular protests in regions such as the Middle East. Sudan, Yemen, and Lebanon are facing the same crisis this time."

Global political situations, including the possibility of U.S. active involvement in the China-Taiwan conflict, Brazil's presidential election in October, and Turkey's economic direction depending on the 2023 election, were also cited as risk factors.

However, Bloomberg cautioned, "In 2020, the global economy was worse than markets had expected, but that was not the case in 2021. Some countries recovered remarkably quickly," advising not to view next year's economy only negatively.

This content was produced with the assistance of AI translation services.