Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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2022 means the birth of slowflation
Christopher Dembik
Head of Macroeconomic Research
Summary: Looking ahead to the new year, we have asked the Saxo Strats what they will be looking at in 2022. This is the inaugural article from our economist Christopher Dembik, looking at how the macro economy scene is expected to play out.
Our baseline for 2022 is that growth will disappoint while inflation will surprise on the upside. The U.S. Federal Reserve forecasts that the U.S. YoY growth will reach 4 % in 2022, for instance. This seem high in our opinion, with three interest rate hikes expected, and perhaps four if inflation is above the target, and thus we see the U.S. economy cooling down more than most of our economist colleagues. We have entered a new period of economic history: the slowflation, with slower growth and high inflation.
2021 is behind us and now it is 2022. While we aren’t out of the pandemic’s shadow yet, the global economy powered through last year and with it followed discussions about how aggressively especially the US, UK and European central banks should start rolling back their historically large support to the financial markets and increase interest rates. These discussions have occurred on the back of inflation numbers that have soared, with one of the primary outstanding questions being whether it is elusive or here to stay.
Navigating this inflation headache was complicated in 2021 and it will remain a major issue in 2022. During the peak of the pandemic, governments protected income and a large share of that income went into goods when the economies re-opened. Inflation came from the production side due to bottlenecks, underinvestment in fossil energy infrastructures and container imbalances, amongst other things. Some factors pushing inflation upward are cyclical. Others are structural.
Looking at this picture, there’s little doubt that on average inflation in the coming years will be higher in most countries than in the decade prior to the pandemic. Most central banks are aware of this new reality, but there are some exceptions. A bunch of central banks, such as the European Central Bank (ECB), still consider that inflation is transitory. In our opinion, this is a wrong macroeconomic assessment. Inflation is here to stay. The ECB is therefore well behind the inflation curve and it begs the question about how – if they realise this – will they then tighten their fiscal policy significantly?
There is a high level of uncertainty about the trajectory of growth too. Our proprietary leading indicator for growth, global credit impulse, tracks the flow of new credit for the private sector. It is expressed as a percentage of GDP. It is now at a turning point, running at minus 1.3 % of global GDP according to our preliminary estimates. When our indicator turns negative, we consider it a sign that global growth will slow down significantly six to nine months afterwards. In that case, the slowdown could start from Q2-Q3 onwards next year. This scenario has not been priced in by most investors.
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