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London — Bet all you like on how a post-Covid-19 world might shape up but the global economy remains far from any state of normality as we enter 2022.

As after the global banking crash 13 years ago, economists and investment managers have been quick to speculate about the “new normal” that will emerge once the pandemic has passed.

The phrase, coined after World War 1 and used to describe the changed state of affairs following global crises, aims to capture what endures from the blow-up to shape a new status quo.

The new normal after 2008 saw the world economy settle into a decade of sub-par growth and nonexistent inflation. Rock-bottom interest rates and central bank stimulus buoyed asset prices and dampened market volatility — but stagnant real wages fed seething political discontent.

Covid-19 has changed political priorities, placating some of those angry voters, and upended global supply chain dynamics and even geopolitics. Some economists predict a “roaring Twenties” of real wage growth, but also higher inflation, rising borrowing costs and more economic volatility.

There is little doubt we’re seeing high growth and inflation rates right now as economies reboot and some pandemic policy supports are wound down.

But is this really a new normal?

With vaccines rolled out and supply bottlenecks navigated, this is supposed to be the year in which the dust settles and the true state of the world economy becomes clear.

But as we enter 2022, the persistence of distortions to trade, labour markets, retail prices and spending and saving habits mean fundamentals are still impossible to assess.

The explosion at the turn of the year of the Omicron variant of the coronavirus — even if confirmed to be milder — further blurs the picture.

Differing responses among the big economies to this latest wave — from Britain's “ride it out” approach to China's draconian “zero-Covid-19” lockdowns — complicate the aggregate effect.

Investor outlooks for 2022 have largely stuck with a bullish take on earnings-driven equities, showing a dogged preference for rotating into cyclicals from tech and a pervasive wariness of low-yielding bonds.

But this week's stock market wobble on another hawkish turn from the US Federal Reserve underlines that confidence in another bumper year is shaky and advice for investors more about staying on the bandwagon than striding out on a new path.

Noise and signal

Jason Draho, head of Asset Allocation Americas, at UBS Global Wealth Management, advised people to brace for alarm around economic data, lower returns and more volatility, especially as any Omicron-linked distortions have yet to emerge.

“The market may not look through this economic noise, but that's what it is,” he said, adding that growth and inflation figures are likely to get worse in the first two months.

“There are multiple plausible paths that the economy could take over the next 12 months, and the right investment playbook can vary quite extensively between them.”

This unease about when the Covid-19 coast will clear and what equilibrium might emerge is widespread.

“A unique confluence of events — the restart, new virus strains, supply-driven inflation and new central bank frameworks — are creating confusion as there are no historical parallels,” wrote BlackRock strategists. The unusually wide range of outcomes means they claim they have “trimmed” risk-taking.

And that’s before you get to domestic issues — Brexit in the UK, French and Italian presidential elections, US midterms, China’s “common prosperity” push and property sector woes, and the energy price impact of Russia's standoff with some neighbours.

“We are certainly not at a new normal … we need to put Brexit behind us,” City of London policy chief Catherine McGuinness said this week, adding that the pandemic was masking the impact on Britain's finance industry of leaving the EU.

Central banks appear confident enough of the landscape to be rolling back critical care. In December, the Bank of England became the first G7 central bank to lift interest rates since the pandemic and the Fed is tapering its bond buying and flagging rate rises ahead.

But anxiety about persistent, even if still distorted, inflation spikes may be more a motivation for them than faith in a return to normality.

As was clear again this week, markets may simply be aping policymakers’ playbooks rather than making independent assessments. Although still growing on aggregate, annualised world money supply and central bank liquidity growth is slowing sharply.

If central banks worry they've let inflation become entrenched, they may stop the whole show.

And yet despite — or maybe partly because of — its greater hawkishness this week, the Fed still sees inflation returning to 2% over its forecast horizon. The New York Fed’s new analysis on historic supply chain distortions also reckons these may be close to peaking.

The “new normal”, it seems, is still up for grabs.


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