One theme that we dealt with in our recently published 2022 outlook was that recovery patterns around the world differed and as a result, investors are likely to see different approaches to monetary policies this year. Although we’re only in January we can already see some evidence of this playing out. In the US economic growth continues to be robust as evidenced by stronger than expected housing starts and building permits in December and an improving January Philly Fed reading (all announced last week). In light of this (alongside elevated inflation readings), in our view the US Fed should be increasing interest rates this year and rolling back on its emergency COVID monetary policies.
Contrast this however with the experience in China. Its Q4 GDP report released last week showed that momentum in the economy remains at a low ebb. Although activity accelerated in Q4 compared to Q3, on an annual basis the economy only grew by 4% – probably 1-1.5% below its potential. In our view looser monetary policy is required to arrest this slowdown so we were encouraged to see Chinese authorities cut two key lending rates last week. This gives us confidence that policymakers there stand ready to support the economy in China, something which should support the overall global economic recovery over the medium term.
Last week we also published our Q1 2022 Irish economic outlook indicating that we believe another strong year of economic performance is in the offing. In the short term however, we expect economic data to be a little softer as the impact of omicron washes through. We saw some of this in last week’s construction PMI reading which although relatively healthy (53.7, well above the 50-level indicating growth) was down from November’s 56.3 level. Our overriding view on omicron though is that its economic impact will be temporary and, in that context, the recent news of the removal of most COVID restrictions is very welcome indeed.