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Global growth faces downside risks

We estimate global growth will ease to around 4.5% next year from its rapid 5.8% early recovery rebound estimated this year. However, that lower estimate remains well above its long-run potential of around 3%.

Risk to the economic outlook in 2022 is mostly on the downside. Output will expand by around 3.5% in the US, 4.4% in the euro area, 3.6% in Japan and 4.6% in the UK. China will grow nearer its longer-run trend of 5% - normalising from its high 2021 growth but also dampened by restructuring within the property sector and supervisory tightening.

A modest slowdown in recovery during the current quarter and first three months of next year - if not an outright fall in output - is possible as governments, notably in Europe, take new measures to slow rates of Covid-19 infection as the omicron variant goes global. Restrictions on those who are not vaccinated are being phased in. The economic rebound ought then to pick up speed again by the spring of 2022.

The pandemic' s choke point in the advanced world remains capacities of health systems to cope with surges in more serious cases, hence re-imposition of partial lockdown and vaccination requirements. More reassuring is that the risk Covid-19 poses to economic recovery ought to continue moderating with time as governments adopt more targeted responses, the virus becomes more transmissible but less lethal and businesses and people adapt to working under more stringent public health restrictions.

Key Support factors

Reference: Dennis Shen, Global economy set for sturdy if uneven growth in 2022 

The European energy crisis is intensifying due to the cold weather, and gas prices in Europe have been pushed up to record levels. With the soaring gas prices, electricity prices in many parts of the continent have also skyrocketed and are continuing to impact the European economy. However, stimulated by high gas prices, Europe is attracting an increased supply of US LNG and European gas prices have fallen for four consecutive trading days, dropping sharply from their highs.

In recent years, due to the rising labour costs in China, many multinational companies have moved their production lines to Vietnam as planned, and Vietnam, therefore, has taken over the transfer of some labour-intensive industries. The massive inflow of foreign direct investment into Vietnam's manufacturing sector, combined with the country's cheap labour, has led to a rapid transformation of Vietnam's economy and industrial structure, and the country's exports of electronic products and machinery have achieved rapid growth, contributing to the country's dynamic economic development. Before the outbreak of the pandemic, Vietnam was one of the fastest-growing emerging markets in the world.

According to the data from the World Bank, Vietnam's population exceeded 97 million in 2020, approaching 100 million, indicating an availability of demographic dividend. The adequate, cheap and skilled labour force of the right age is an important support and foundation for Vietnam to achieve excellent results in a short period. The latest data shows that in the first half of this year, Vietnam's manufacturing sector contributed 53% to the economic growth, a glimpse of Vietnam's "demographic dividend".

As the chart shows, Vietnam has maintained high economic growth since the beginning of the new century, with the economic growth rate above 5% for a long time. In recent years, Vietnam's economic growth rate once surpassed that of China and was promoted to be one of the fastest-growing countries in the world. Even amid the pandemic, Vietnam's GDP in 2020 was 0.27 trillion USD and the economy grew by 2.91%, making it one of the few countries to achieve positive economic growth. In 2021, when the pandemic hovers over the world, the World Bank still expects Vietnam to achieve a faster growth rate overall, or specifically, 4.8%.

Vietnam's economy has faced many difficulties and challenges this year due to the impact of the pandemic, with the country's commodity supply chain breaking down and many businesses having to close, suspend operations and many workers losing their jobs. However, there are still bright points in Vietnam's economic picture in the first 11 months of this year, which are highly rated by economists.

Against the backdrop of the pandemic disrupting the supply chain, Vietnam's total imports and exports in the first 11 months of this year still increased by 22.9% year-on-year, with total imports and exports already reaching $602 billion and expected to reach $660 billion for the whole year. In addition, in the first 11 months of this year, Vietnam still attracted foreign direct investment (FDI) of $26.46 billion, a slight increase year on year. Among them, the processing manufacturing industry attracted $12.78 billion in foreign investment, accounting for 57.9% of the total registered capital. The industrial production index grew 3.6% year-on-year, higher than the 3% growth rate for 2020.

Similar to the economic transformation of China and Japan, Vietnam has attracted foreign investment through cheap labour, land rent and preferential policies to take up the transfer of labour-intensive industries and is expected to become the next manufacturing centre in Asia, but many problems are plaguing Vietnam.

First of all, Vietnam is a country with a relatively small market that can hardly accommodate too much foreign investment. Meanwhile, Vietnam's infrastructure is becoming a bottleneck for its development. Due to the long and narrow territory and scattered infrastructure, the transportation interconnection between the north and south of Vietnam is also relatively limited. Analysis shows that infrastructure constraints and low environmental standards are weakening the competitiveness of Vietnam's industrial parks in attracting foreign investment, and the country's poor infrastructure and insufficient warehouse storage capacity.

Secondly, Vietnam's major industrial clusters are still in the development stage, with high reliance on China for production components. Vietnam's production capacity and supporting supply chain are not complete, and many multinational OEMs invest in factories in Vietnam that mainly assemble products, while the procurement of raw materials, components and other areas still depend on Chinese factories.

In addition, Vietnam is currently undertaking a typical labour-intensive industry, lacking institutional and technological innovation capacity. If it continues to remain open, it will not be difficult for Vietnam to rise to a middle-income country with this model. However, to further improve national income, Vietnam needs to make other reforms, as well as invest massively in education and research.

Finally, under the impact of the pandemic, Vietnam's economy may face high inflationary pressure in 2022 due to rising prices of raw materials, goods and services. At the same time, the policy of stimulating investment support and enterprise support in 2022 also increases inflationary pressure, and with the continued emergence of covid-19 variants worsening the global pandemic, the Vietnamese economy still faces many new challenges in 2022.

Fed officials had expected to keep interest rates at their lowest level for at least two years beginning in 2021, and viewed higher inflationary pressures as a temporary phenomenon as the financial system recovered from the epidemic pandemic. However, they are now about to open a new era of Fed policy in 2022, which includes the possibility of including as many as three rate hikes and a faster-than-expected asset purchase program.

The market today describes the Fed's series of policies as "the last war the Fed usually fights".In the last war, inflation was never a problem and could make the labor market hot, so they say in this war "you can't provide too much stimulus, inflation won't be a problem". They're worried about playing the wrong game.

Inflation is soaring rapidly in 2021. consumer prices rose 6.9 percent year-over-year in November, the fastest rate of growth since June 1982. A measure of Americans' confidence in the U.S. economy fell to its lowest level in a decade as price pressures weighed on people's purchasing power.

A series of measures suggest that investors are beginning to expect prices to continue to rise, although those expectations have fallen from record highs as market participants grapple with slowing growth and the rapid spread of Omicron variants.Fed Chairman Jerome Powell echoed these sentiments in a press conference following the December FOMC meeting, suggesting that the Fed's hawkish stance is intended to put the U.S. Fed on the defensive. Officials believe that inflation will continue until at least 2024, with the personal consumption expenditure price index at 5.3% by the end of 2021, but will slow to 2.6% by the end of 2022.

"We have to set policy now because inflation is well above target," Powell said. "If we knew the labor force participation rate would start rising in two years, would we wait two years with inflation well above the target? Probably not. What is the maximum level of employment that is consistent with real price stability? Debatable."

For months, the Fed's rallying cry has been that inflationary pressures will subside once the U.S. economy survives the epidemic pandemic. Supply pressures have led to severe shortages, and officials have seen a huge gap persist in the U.S. labor force, with nearly 2.3 million workers still without jobs to this day. The Fed sees this as a sign that the job market may not be as tight as some measures suggest and that they will be incentivized to return to work once the epidemic subsides.

The Fed officially announced the start of the tightening cycle at the November monetary policy meeting. At the same time, it accelerated the pace of taper at the December monetary policy meeting. The market expects the Fed will officially start the interest rate hike cycle in mid-2022. The European Central Bank, which is contrary to the Fed’s “frequent actions”, has been standing still. The policies of the European Central Bank and the Federal Reserve are differentiated. 

The primary goal of the ECB is to maintain price stability in the Eurozone, and HICP is used as a measurement standard for assessing the achievement of the price stability goal.

The ECB revised its inflation criteria in July this year from the previous "HICP growth below but close to 2% year-on-year" to "two percent inflation over the medium term". The new inflation target emphasizes “symmetry”. The inflation rate fluctuates moderately above and below the 2% mid-term target. It is reasonable for inflation to be slightly higher than the target level for a period of time. This means that the ECB will have a higher tolerance for inflation and its policy objectives will be more flexible.

The "Statement on Longer-Run Goals and Monetary Policy Strategy” announced in August 2020 made two important changes to the Fed's monetary policy objectives: (1) Adopting an average inflation target. The Fed's long-term inflation target was changed from "2%" to "2% on average" and "long-term inflation expectations were anchored at 2%". (2) Change the assessment of the employment target from "deviations of employment from its maximum level" to "the shortfalls of employment from its maximum level".

In terms of inflation, the most obvious difference between the European and American inflation structure lies in the price of durable goods and the price of housing. Both the United States and Eurozone countries suffer from inflation caused by rising energy prices.

November energy items in the United States and the Eurozone increased by 33.5% and 27.5% year-on-year respectively. However, in terms of durable goods, the prices of second-hand and new cars in the United States increased by 31.4% and 11.1% year-on-year in November; Eurozone vehicle purchase prices increased by 4.7% year-on-year, a significant increase from before the pandemic, but the increase was far less than that of the United States; The prices of furniture and home appliances in the Eurozone increased by 1.1% and 1.6% year-on-year respectively, which was lower than the ECB's mid-term target, while prices of furniture and home appliances in the United States have risen rapidly since March this year, each exceeding 6% year-on-year.

In terms of residential prices, the year-on-year growth rate of housing rents in the United States has continued to rise since March this year and reached 3.9% in November, while the year-on-year growth rate of housing rents in the Eurozone was 1.1% in November, down 0.1 percentage point from October and well below the 2% inflation target. 

In terms of the labour market, the eurozone and the US show different trends in unemployment rates, job vacancy rates and employee payrolls. In terms of unemployment rates, the US unemployment rate rises to 14.8% in April 2020 and then gradually falls back to 4.2% in November 2021, which is still short of the 2018-2019 average of 3.8%.

Unemployment rates in Germany and France also rise in 2020 as a result of the epidemic, but to a lesser extent. The unemployment rate peaks at 9.0% in France in the epidemic, just 0.3 percentage points higher than the 2018-2019 average of 8.7%; the unemployment rate peaks at 6.4% in Germany in the epidemic, 1.3 percentage points higher than the 2018-2019 average German unemployment rate of 5.1%. a large number of US employees leave their jobs in 2020 and no longer work, while employees in eurozone countries retain more jobs and work fewer hours. As a result, when the economy resumes operations in 2021 after the epidemic has been contained, the US is in a hiring dilemma and companies are forced to offer higher wages to attract labor. The labor shortage pushes up wages and higher wages push up inflation; the opposite of the eurozone where inflation comes first and then wages are raised due to inflation.

According to statistics released by Statistics Korea, the total population of South Korea will be 51.75 million (including foreigners living in Korea) in 2021, which will be 90,000 fewer than the 51.84 million in 2020. This means that Korea's population will experience negative growth of the total population from 2021 onward after peaking in 2020.

In 2020, Korea's population will naturally decrease by 33,000 people compared to the previous year, and for the first time in history, there will be a "death crossover" - a phenomenon in which the number of deaths exceeds the number of births - but the total population, including foreign residents living in Korea, will naturally decrease. This is the first time this year. The total population is expected to drop by 14.18 million in 50 years, and there is a lot of talk of " Korea is disappearing".

The data show that fewer than 280,000 newborns will be born in South Korea in 2020 compared to 2019, a 10% decrease from the previous year. 2021 continues the decline, and in the third quarter alone, South Korea's newborn population fell by 3.4% year-on-year, a record low since this data began in 1981, and the total fertility rate for society was 0.82%, down 0.02% from a year ago. It is reported that Korea's birth rate has been on a downward trend since 1965, and although it is falling elsewhere in the world, Korea's total fertility rate is declining particularly rapidly, making the country's demographic problems extreme.

Extreme house prices under the epidemic

The Global Home Price Index report released by Knight Frank, a British real estate information company, showed that South Korea's house prices rose 23.9% year-on-year in the third quarter, topping the list of 56 countries surveyed by the agency based on one item of real increase in price increases, according to the Korea Daily Asia.In fact, Korea's soaring home prices are not something that happened this year. The average price of a 99-square-meter apartment in Seoul has almost doubled from 620 million won (about $548,300) to 1.19 billion won (about $1.051 million) in the four years since the Moon Jae-in administration took office, according to a survey by the Korea Citizens' Coalition for Economic Justice Practices cited by the Korea JoongAng Daily. In this four-year period, the real income of Korean nationals rose by only about 7%.Some analysts point out that the current round of Korea's house price surge is mainly caused by the easing policies in response to the epidemic and the impact of inflation. With borrowing costs at record lows for an abnormally long period of time and the impact of inflation, the Korean people have expanded their household debt to buy houses, which has not only led to abnormally high housing prices, but also to rapid growth in household debt.

Some time ago, the government controlled the lending policy, so that young people without parental support could not buy a house. Currently, Korea is in a crisis of confidence in its real estate policy, and the society is full of anxiety that "if you cannot buy a house now, you will never be able to buy a house. Most young people feel that the lack of a house is the reason why it is difficult to get married and have a family, and is a major reason for the declining birth rate in Korea.

Work and childcare costs

South Korea has the longest working hours in the world, and young Koreans have a schedule that is just enough to live well alone, making it difficult to blend in a second or third person for daily life.

In 2018, the Korean Labor Standards Act set the maximum number of working hours in a week at 52-68, which means an average working day of up to 10.4-13.6 hours, which works out to nearly half of the day being spent at work.

For this reason, in July of this year, Korea set the maximum working hours of 52 hours a week, which is 4.5 hours more than the average weekly working hours of Chinese employees (47.5 hours).

Adding to this, Korea's economy has grown slowly since 2000, and the unemployment rate for young people is more than twice the overall unemployment rate, with less than 50% of those aged 20 to 29 in employment status. The money earned from hard work is only enough to meet their daily needs.

Moreover, the cost of childcare in Korea is high, and competition among Korean children is fierce. In Seoul, the only good schools are those recognized top universities, namely Seoul National University, Koryo University and Yonsei University, and there are only a few well-known large corporations. This leads to extreme competition for Korean children right from birth. Data shows that in 2017, the average monthly tuition fee per person in Korean primary and secondary schools alone reached 271,000 won (about $251.37).

Fundamentally, South Korea's upward path is exceptionally narrow, with a handful of large plutocrats monopolizing the country's economic lifeblood. Even despite the hard work, it is difficult for Koreans to have children. Not only is it difficult to create a better life for the next generation, but it also tends to put families in a tight spot.