World Economic Outlook 2022
December 30, 2021
About the author:
Zhang Chao, Fellow of Taihe Institute
My overall predictions for the world’s economic outlook in 2022 are as follows:
1. After a “dead cat bounce,” the US economy will fall off a cliff in the second half of 2022, bringing widespread volatility to world financial markets.
2. Brexit is yet to be completed. Europe will be more divided, leaving its economy in limbo.
3. Due to economic volatility and political upheavals, the UK and the U.S. will both see social conflicts and financial difficulties.
4. In 2018, I said the Chinese economy would go through an “eight-year war.”[1] 2022 will be the hardest year of that “war” for the Chinese economy— this is without taking into account of the pandemic that hit in 2020.
5. Capital markets will cool down. On a global scale, the scramble will spread from financial markets to commodities, and food security will need to be given the utmost attention.
6. The world economy will come to a turning point in 2024, and gradually recover starting from 2025. After this, the East will overtake the West.
I hope to elaborate on my predictions from two perspectives:
First, the international economic environment has undergone many irreversible changes due to the pandemic. We are experiencing a corrosion of globalization, which is the foundation for world economic stability. De-globalization has become a reality, and shows no signs of slowing down. With the economic foundation destroyed and the supply chain disrupted, economic development becomes a zero-sum game, leading to major economies fighting each other for resources. For example, the arms deal dispute between the AUKUS and France, the Sino-US economic war, and financial market turmoil in small- and medium-sized economies. We will see more and more such events in the future.
In this context, the world economy will divide into several poles, with one represented by the UK and the U.S., and another represented by the continental European countries such as Germany and France. Due to the over-issuing of US dollars during the pandemic, the leverage ratio in the U.S. and the UK has increased by 30%. The huge financial asset bubble needs to be supported by tangible wealth. But the simultaneous emergence of two contradictions, the inflated US national debt and high US inflation, makes it difficult for the UK and the U.S. to resolve the potential crisis through their own economic development. In view of this, the Fed’s shrinking balance sheet and growing expectations of interest rate hike, triggered by high inflation in 2022, will destroy the “engine” of the US economy, namely “money-printing,” making it difficult for the capital market to continue the prosperity it has enjoyed since 2010.
In essence, Brexit is the result of a divergence of opinions between Anglo-Saxon culture and the culture of continental Europe in terms of economic development. Europe has a mixture of cultures besides the two mentioned here. Therefore, we will probably see more countries exit the EU. The continental economy depends greatly on globalization. Due to limits on population, territory, and industrial structure in Continental Europe, it lacks momentum and is unable to become a core driver of global economic growth.
“In this context, the world economy will divide into several poles,
with one represented by the UK and the U.S.,
and another represented by the continental European countries
such as Germany and France. ”
Chinese economy in 2022:
In my global economic outlook for 2018, I coined the term “eight-year economic war.” I thought 2021 would be the hardest year for the Chinese economy since 2018. However, the COVID-19 outbreak has disrupted the global economic order and prolonged the “war.”
Since 2018, China’s economic reforms have gradually shifted their focus from land to technology. It will take time to deal with the problems accumulated over the 40 years since reform and opening up, and to create new opportunities that spur economic growth. Under favorable conditions, it would take around eight years for China to complete this great transformation. Although progress has been temporarily disrupted by the pandemic, it has not changed the country’s established approach. China has been steadily adjusting its economic development guidelines, which will inevitably cause short-term volatility that cannot be explained by the so-called “economic cycles.”
China has dealt with its high leverage ratio earlier than the West and it is the only major economy in which the leverage ratio fell before the post-pandemic era began. Nonetheless, the debt risk resulting from land finance and other perceived risks in economic transformation and restructuring, including the risk of frictional unemployment, will become more pronounced from 2022 to 2023. This is an inevitable obstacle that China will encounter. But it is also an adversary that China must overcome during its “eight-year war.”
In short, in an effort to reconstruct its debt and economy, create new growth points while debunking the anti-China conspiracy theories from the West, China is likely to reach an inflection point in economic growth and witness a marked improvement in the quality of economic development in about five years, thus completing its transition to a new growth engine.
[1] The term “eight-year war” is often used as a reference in China to the eight years of arduous fighting against the Japanese invasion from 1937 to 1945.
This article is from the January issue of TI Observer (TIO), which is a monthly publication devoted to bringing China and the rest of the world closer together by facilitating mutual understanding and promoting exchanges of views. If you are interested in knowing more about the January issue, please click here:
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