Guest comment: The economy has to prepare for another year of roller coaster ride
Rarely in the past few decades have we looked at a new year with so much uncertainty, worry and fear as we do today. We are in the middle of the fourth wave of the corona pandemic, and no one knows whether it will finally fade away sustainably in the new year or only temporarily and cause new catastrophes. This uncertainty is poison for the economy. Once again, all forecasts will not be worth the paper they are written on.
We have to prepare for another year of roller coaster ride, at least for the economy – there will be ups and downs, unexpected twists and turns, glimmers of hope and also setbacks. The economic forecasts of the past two years were almost always completely wrong, sometimes they were far too pessimistic, then again too optimistic. At the beginning of the pandemic in spring and summer 2020, the worst was feared, also for the economy. Many expected the economy to collapse by up to ten percent.
The surprisingly good restart in summer 2020 then led to premature euphoria and a lot of optimism. In the summer and autumn of 2020, it was simply impossible to imagine that there could be a second, third and fourth wave, and especially not that there would be no way around renewed corona restrictions. The German economy did not grow by up to five percent in 2021, as had been hoped for in the first half of 2021, but only by just under half.
For the sake of fairness, it has to be said that economic forecasts only ever represent scenarios – that is, “if-then analyzes” – that have to be based on many assumptions that often have nothing to do with the economy. Nevertheless, one should not underestimate forecasts, because they are of value for decision-makers in business and politics. Forecasts give you an orientation on how you can react to different developments.
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Most economic forecasts are also extremely optimistic for 2022. Up until a few weeks ago, we were assuming economic growth of more than four percent for Germany and Europe and more than five percent for the world economy. That would be such a strong growth as we have not seen since the recovery after the global financial crisis since 2010.
The blindness of economic models
This optimism is due in part to the blindness of economic models. They assume that the economy will again fully exploit all potential – i.e. all available labor, financial resources and the company’s production capacities. There are concrete reasons for this optimism: the order books of companies are overflowing, the financing conditions for investments remain extremely favorable.
In Germany in particular, optimism is so great because we are much more dependent on exports than other countries and, above all, the emerging countries and world trade could see a strong recovery in 2022. However, this optimism is offset by a healthy dose of skepticism or, according to Murphy’s law: If something can go wrong, it will go wrong. Because there are so many different risks for the new year that could slow down or even derail the economic recovery that at least one of these risks is very likely to materialize.
What we should not forget now: The greatest economic risk is and will remain the pandemic. If it cannot be finally brought under control in 2022 – and not just in Germany and Europe, but worldwide – then there will inevitably be new economic upheavals. This could be the case with global supply chains, for example, or with a view to consumer demand, as people prefer to put their money on the high edge in times of such uncertainty.
But there are also other risks that are only indirectly related to the pandemic: In the coming year, there could be more bankruptcies of companies that were previously protected by exemptions for filing bankruptcies and generous state economic aid.
The trade conflicts between China and the USA, but also with Europe, could flare up again, especially as China is increasingly self-confident and confrontational. This would hit open economies like the German one hard.
Emerging economies are fighting against capital flight
And the risk of financial crises is still clearly underestimated. This may only be a small risk for Germany, but many important emerging countries have major problems, as the imbalance of a huge real estate company in China signals. Many other emerging countries are struggling with over-indebtedness and against capital flight, which could upset their own economies and financial systems.
Turkey, with its galloping inflation, is currently an inglorious example. Such regionally concentrated financial crises would slow down the world economy, because the dependency of global supply chains is so great that problems can become painful for everyone, even in what is believed to be an economically less important part of the world.
So with a view to the economic outlook for 2022, there are good reasons for optimism, but equally good reasons for pessimism. Politics can do more than pray and hope. The new federal government should communicate very clearly at an early stage that economic aid – from short-time working benefits to bridging allowances – will also be available in 2022 to protect companies and employees.
The new federal government must quickly and decisively set the course for an economic restart. Of course, fighting the pandemic is the most pressing problem. Nevertheless, politicians should show a long-term way in which the German economy and companies can use climate protection and digital transformation as an opportunity.
Monetary policy will tend to remain expansionary
The monetary policy of the European Central Bank and other central banks is also likely to remain relatively expansionary. The risk of inflation could require some of the central banks to do a balancing act and be faced with the decision of whether to give more weight to increased inflation or a weaker economy. However, the chances are good that inflation in Europe will fall significantly in 2022 and create further support for consumption.
We will have to prepare for a very difficult economic year 2022. The best that politics can do is to ensure stability and thus offer companies and people a long-term perspective.
This is another reason why it is of crucial importance that the new federal government presents a convincing, long-term strategy for climate protection and digital transformation that gives hope, meets expectations and thus supports the economic recovery. Then the reasons for optimism prevail, and the year 2022 could surprise us economically positively.
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