Key events in developed markets next week

The US economy has performed admirably in 2021, recovering all of the lost output due to the pandemic with employment less than four million shy of the pre-pandemic level. Inflation is a concern though and the Federal Reserve is now indicating it is going to be taking action with the prospect of three interest rate hikes next year despite ongoing uncertainty about the path of Covid. The last couple of weeks of 2021 will see the release of durable goods orders, which are rebounding impressively. The core figure, which strips out volatile defence and aircraft orders, points to a very positive outlook for capital expenditure in the first half of 2022 while robust personal income numbers should allow consumers to continue spending aggressively. Other data includes regional manufacturing figures, which should continue to highlight the strength of demand though production bottlenecks remain an issue, meaning that prices should continue to grind higher (although there is evidence that some of the heat is coming out of the housing market). All in, we remain of the view that the threat from Omicron is manageable and that the economy will expand by around 4.5% next year with inflation likely to average something similar. The odds are growing that our call for two Fed rate hikes in 2022 will be increased to three.

The extremely rapid spread of Omicron in the UK looks set to hit social spending and worker availability over the festive period. Further restrictions of some form look increasingly likely, though perhaps not until after Christmas itself. One of the main remaining questions for the economy is how the Treasury will respond. Even in the absence of renewed lockdowns, consumer services businesses are set to see revenues fall, perhaps steeply, into the festive period. For the time being, the Treasury is focusing on existing support measures, though a return of the furlough scheme in some form shouldn’t be ruled out.

Modelling the impact of all of this on GDP numbers is tricky, but as a rule of thumb a return of some modest restrictions – school holidays extended, hospitality constrained etc – would probably shave 1-1.5% off January GDP. A full lockdown perhaps would increase the hit to around 5%.

All of this will help determine whether the Bank of England hikes for a second time in February. Policymakers are clearly worried about inflation, and they are probably right to say that Omicron is unlikely to materially change the outlook in 12-18 months. But the current direction of Omicron and the ensuing turbulence suggests policymakers might hold fire in February, and instead wait until March or May before hiking again. In total we’re looking for two rate rises next year.