2021: Not great but could have been worse

As 2021 draws to a close, it has felt in many ways like a year in the holding pen as we wait for the pandemic to blow itself out. In the western world we have learned to cope with Covid to some degree and even though life is not back to normal the shock value which accompanied the onset of the disease in early-2020 has been conspicuous by its absence. Unlike 2020 when our year-ahead predictions were blown out of the water, an assessment of the predictions made at the start of the year indicates that GDP growth projections broadly met expectations and equity markets continued to power ahead. It was also the first year in four in which we were spared the spectacle of Donald Trump in the White House, thus taking some heat out of global politics. Not everything went according to plan, of course. One thing that was unforeseen was the huge surge in inflation which necessitated the Bank of England doing the unthinkable by raising interest rates.

Another year dominated by Covid

At the end of 2020 things looked grim on the Covid front. A year ago the world had registered 82 million cases and 1.9 million deaths. They got a lot worse in 2021: There are now 287 million registered cases and 5.4 million deaths. These are clearly an underestimate. Europe and North America together account for more than 50% of all cases and deaths, despite accounting for just 15% of the global population. This is largely attributable to better data recording and testing procedures in the developed world as countries with better developed health systems produce more accurate (or more properly, less inaccurate) data. It is also the result of the wilful underreporting of Chinese figures. According to the WHO, China has recorded just 131,315 cases and 5,699 deaths, of which just 1,045 have occurred since May 2020. The epidemiological profession relies heavily on accurate data to model the incidence of disease and project its progress. Fictional data from the region where the disease was first recorded does nothing to help the rest of the world cope with the pandemic.

One of  the great successes in 2021 was the rollout of the vaccine programme. I must confess in autumn 2020 to being somewhat sceptical that governments would be able to roll out the vaccine as quickly as they promised and that it would take until the second half 2021 before needles would start going into arms in a big way. As of today almost half of the world’s population has been fully vaccinated (two shots) with 23% of Europeans and 20% of Americans having received a third booster dose. The vaccine rollout across the EU started more slowly than perhaps it should have but by end-2021 the proportion of those fully vaccinated has caught up with the UK, whose government trumpeted the speedy rollout of its vaccine programme as one of the benefits of leaving the EU (spoiler alert: it wasn’t).

Economy on track but inflation is not

Largely as a consequence of the vaccine rollout, which reduced the extent to which governments were required to lock down their economies, the global economy has rebounded sharply and appears to have suffered considerably less scarring than I anticipated a year ago. After contracting by 3.1% last year, global GDP is estimated to have grown by 5.9% this year and is projected to grow by 4.9% in 2022. Although global GDP is back above 2019 levels, output in the industrialised world is not quite there yet (although US GDP has been above pre-Covid levels since Q2 2021). Nonetheless, compared to expectations in mid-2020, the recovery has been stronger than anticipated and owes much to the actions of governments and central banks in providing fiscal and monetary support.

One of the unexpected consequences of the post-2020 shock has been the huge surge in global inflation. There were suggestions in the early stages of the pandemic that the hit to the supply side of the economy was such that demand would recover more quickly than supply and that there would be a hit to inflation in the medium term. But this was not the consensus view (nor mine). As recently as April the IMF was reporting that inflation would “remain contained in most countries” and projected US inflation in 2021 at 2.3%: over the first 11 months it has averaged 4.5%, reaching a 39-year high of 6.8% in November. The reawakening of the inflationary threat will prove to be one of the major challenges facing monetary policymakers in 2022. I maintain the view expressed in mid-year that the inflation threat will fade but also maintain the view that higher inflation justifies the “case for taking away some of the extreme monetary easing put in place over the last year” – and the Bank of England has duly obliged, unexpectedly raising Bank Rate by 15bps to 0.25% earlier this month. The Fed is likely to follow suit in 2022.

Markets also performed in line with expectations

As predicted, global equities remain the asset class of choice – there really are few places to invest in this low returns environment that will generate the kind of boost that equities are able to give. The S&P500 surged by 27% in 2021 compared with 15% for the FTSE100 and 16% for the DAX. I suspect further upside is likely in 2022 although not at anything like this pace. Bond yields did edge up a little in 2021 in contrast to expectations, with the US 10-year yield up 59 bps on the year, but given the unanticipated surge in inflation that is not such a bad result.

Brexit not yet done

According to Boris Johnson, Brexit was “done” at the end of 2020 when the UK left the protection of the transition arrangements. But as I have long pointed out, Brexit is a process not a one-off event, and it is not going well. I will come back to this issue in 2022 but suffice to say the economic costs are making their presence felt. UK trade flows remain well below their pre-Covid levels whereas German trade has recovered back above these levels. Meanwhile, the OBR calculates that Brexit will cost 4% of output in the long-run versus a 2% hit due to the pandemic. The resignation of Lord Frost as the UK’s Chief Negotiator of Task Force Europe earlier this month, partly over the handling of Brexit, suggests that the process is not delivering what its most vigorous proponents expected. Nor are voters enamoured of the process with a mounting proportion increasingly viewing the vote as a mistake (chart).

Don’t forget environmental issues

For a brief period last month, environmental issues were all over the news as the climate disaster slowly makes its way up the agenda. But governments have not (yet) stepped up to the challenge. The real action on reducing carbon emissions has to come from China and India, with Asia accounting for over 90% of CO₂ emissions since 1990, but neither of them has a plan in place which will limit the rise in global temperatures over the next decade. Those who have watched the film Don’t Look Up, the current big hit on Netflix, will recognise the unwillingness of governments to deal with issues which clash with their electoral priorities. It is not just Asia which has to do more to deal with climate issues: Europe and the US will also need to act, largely because they are in a better financial position to do so. Perhaps what 2021 demonstrated (yet again) is that whilst we all like the idea of saving the planet, we are unwilling to pay the price – both financially and in terms of lifestyle change – to make it happen.

It has not been a great year by any means, but if you are reading this, at least you got through. A Happy New Year to you all and here is wishing a healthy, happy and prosperous 2022