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After two years of abnormal economic activity around the world, CIBC Asset Management’s chief investment officer and strategist says 2022 could be the start of a more “normal” environment.

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Luc de la Durantaye predicts the global economy will experience 3.8% to 4% growth this year, more moderate than in 2021 but above potential. “That’s a bit below consensus, which is different from where we were [in 2020 and 2021],” he said. “But still, that’s more normalization of the economy.”

De la Durantaye said dependence on fiscal spending should also normalize as governments retake control of their expenses. Despite ongoing inflation pressures dragging on the economy, he said, “the real economy will improve.” 

Further, de la Durantaye predicts inflation will peak. 

He said while inflation will likely stay above central banks’ target of 2% in 2022, reopening the economy should normalize demand. Inventories will be restocked, consumers will return to spending more on services and less on goods, and companies will start reinvesting in new technologies, all of which de la Durantaye said “should be supportive for growth.” 

However, a tight labour market and the red-hot housing sector could keep inflation higher than pre-pandemic levels, he said. 

Driving his main scenario is the underlying assumption that the world economy will learn to live with the coronavirus. 

“The evolution of the pandemic has left a big footprint on the economy,” de la Durantaye said, but the combination of increased vaccination, higher natural immunity to the omicron variant, and developments in therapeutics should mean less economic impact.

Another assumption, which de la Durantaye said is the more tricky of the two, is policy normalization. Both fiscal and monetary policy are starting from historically high levels of accommodation, making the economic impact of normalizing policy “more uncertain than usual.”

For example, in just two years, the Fed’s balance sheet is close to $9 trillion, up from less than $4 trillion before the pandemic. 

“They have announced that they want to normalize the balance sheets, and that involves removing a very large sum of liquidity from the economy, which has never been done before,” said de la Durantaye. “So that creates a certain degree of uncertainty as 2022 evolves.”

He also highlighted a number of geopolitical risks this year, including midterm elections in the “increasingly divided” U.S., the relationship between the U.S. and Russia, OPEC’s normalization of oil production, and U.S.-China relations. He said all these things “could positively evolve or negatively evolve the outlook for 2022.”

“We have an eventful year ahead of us, that’s for sure,” said de la Durantaye.

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