Despite the emergence of the Omicron variant during December, the economic picture for 2022 looks much brighter than you might think. Assuming the current situation can be resolved with short-term measures and restrictions, the economic recovery may resume quickly.
Until recently, some of pressures facing business leaders were beginning to subside, but economist John Ashcroft believes the disruption we are facing is only a temporary blip.
Speaking at Robert Half’s sister company Protiviti’s Quarterly Economic Update earlier this month, Ashcroft suggested that many of the current headaches being faced by business leaders will peak at the end of this year, before starting to fall away in 2022.
He believes that concerns about supply chains, recruitment and energy costs will begin to subside in 2022 as the global economic balance begins to return to normal. However, he warned that leaders will need to undertake robust scenario planning to truly understand the impact of increasing interest rates and inflation on their businesses and employees.
While the demand for goods has bounced back rapidly, disruption within supply chains means that some companies have struggled to deliver. Workforce disruption, driven both by sickness and a well-publicised lack of low-skilled workers (such as lorry drivers), and problems with the availability of shipping containers, have had a knock-on effect, pushing up logistics costs.
Although the recent increase in Covid-19 looks set to impact the early months of 2022, supply chains should return to normal in the second or third quarter of the year, but some concerns remail about the manufacturing and construction industries. Prices for shipping containers have now dropped from their previous highs of $20,000 and some commentators are even predicting an over-supply of goods in the middle of next year.
Energy prices are expected to ease as we move into 2022. Wholesale gas prices remain high, but they are no longer at their September peak. Oil prices are hovering around $71.23 (Brent Crude) and are expected to stabilise at $75next year as inflation starts to settle down, although it could take some time.
Ashcroft suggested that inflation is a transitory phenomenon, but it could take some time for the market to catch up with changing prices. The Bloomberg Commodity Index is currently around $95, down by approximately $10 since the third quarter of 2021 – however, it still sits above its value of $75 to $80 at the beginning of the year.
While this is a positive indication for the economy, it does not mean on-the-ground energy prices will recover for businesses and their employees will improve. In the UK, the government is expected to significantly increase the energy price cap, which could increase energy bills dramatically, leaving business leaders with an overheads headache to replace the economic one.
2021 has been another incredible year for recruitment, with vacancies reaching an all-time high at 1.2 million earlier this year, and unemployment remaining low at around 4 per cent, despite the end of the UK Government’s furlough scheme. The supply and demand issue when it comes to top talent is creating challenges across a range of sectors, particularly technology, where demand for developers continues to rise.
The events of the past two years have seen many people reevaluate their work-life priorities, resulting in unprecedented levels of attrition, known by some as ‘The Great Resignation’ These trends are driving up salaries as businesses try to attract new staff, which is only increasing job hopping behaviour.
If movement continues at the same pace and salaries continue to increase, this could create issues for business leaders in the year ahead in terms of productivity and inflation (as salary increases will often be passed on in the costs of goods and services), making the current market unsustainable.
Experts at Robert Half believe that the jobs market will continue to be incredible busy throughout 2022 as new investment and the adaption of new technology creates new roles for businesses, and employees decide to move on when they feel more certain of the economic recovery.
However, Ashcroft believes that current trends will dissipate over the next 12 months and the market will return to normal, believing that much of the upheaval is linked to businesses adapting to new ways of working and changing staff attitudes. He suggests that the market will settle down once new plans are in place and employees have more clarity about the future.
The 2022 Outlook
Throughout Protiviti’s Quarterly Economic Update, Ashcroft painted a clear picture of a world economy gradually returning to normal. Following a contraction of 3.1 per cent in 2020, growth will reach 5.9 per cent in 2021. Although process may take a dip in response to increases in Covid-19 cases, he expects healthy growth throughout 2022 and into 2023.
Inflation has peaked at the end of this year, but Ashcroft believes this will stabilise before coming down towards three per cent in 2022. Following the Bank of England’s decision to increase the base rate in December, he thinks this is the start of a gradual increase to 0.75 per cent by the end of 2022 and 1.75 per cent by 2024.
Summarising his thoughts, Ashcroft said, “After a setback, economists tend to worry about scarring, lasting damage to parts of the economy. The manufacturing sector may take some time to bounce back, but overall, the economy is pretty resilient.”
“Notwithstanding a setback from the Omicron variant, the consumer is going to benefit, households are going to benefit. It looks like a good strong basis from which to move forward at the present time.”
But he also added: “In business at the moment, it’s pretty important to have your scenario evaluations: not so much about growth; but for inflation and interest rates.” Many will be thinking about the impact of another Black Swan event in the future too.
John Ashcroft from The Saturday Economist has joined forces with Protiviti to run a series of quarterly briefings on the world and UK economy.