As much as we’d like to look ahead to next year, COVID-19 developments are forcing us to focus on the near term. A number of countries have reported cases of a new “variant of concern,” Omicron, and travel restrictions are mounting. Oil prices fell by about US$10/bbl on demand concerns, while reduced risk appetite saw bonds rally and equities fall. This all comes as a number of European countries were already experiencing a fresh wave of infections—for countries like Germany, the worst so far in terms of case growth—and re-introducing some containment measures. Despite early concerns about greater transmissibility and reduced vaccine efficacy, too little is known about Omicron at this stage to say how it will affect the ongoing global economic recovery. Lower oil prices and reduced tourism activity look likely in the near-term, but the broader impact on infection rates, hospitalizations and government-imposed restrictions is hard to say. Our base case continues to be that a higher rate of immunization in many advanced economies will weaken the link between case growth and severe illness/hospitalization. Another wave of infections that slows the recovery has long been a downside risk to our forecast, and the probability of such an outcome has increased.

Assuming Omicron risks are contained, we think growth prospects in 2022 will depend less on government restrictions and more on economies’ true productive capacity. And for a number of those we track, spare capacity is running out. Easing supply chain bottlenecks and rising business investment should provide a bit more running room, but tight labour market conditions are likely here to stay. That’s expected to keep a floor under inflation even as unexpectedly strong headline rates peak in the coming months. With the building blocks of a consumer-led recovery remaining in place, we think central banks will be easing off the accelerator next year. For the BoE, BoC and Fed that means raising interest rates, while for the ECB and RBA we expect QE will be slowed or phased out in 2022. Omicron threatens to delay some of those moves but market pricing is still generally ahead of our expectations for tightening next year.

  • Inflation continues to rise across advanced economies, with year-over-year rates eclipsing last cycle’s highs. Rising energy prices are a factor though inflationary pressure is broadening and capacity pressures are growing in a number of the economies we track.
  • We now look for two rate hikes from the Fed next year. The central bank is considering accelerating its tapering timeline which would increase our conviction that multiple hikes are in store for 2022.
  • Recent inflation and GDP data are consistent with the BoC’s October forecasts, and we continue to look for interest rate liftoff in April 2022. We think markets are over-priced for BoC tightening next year and expect Canada-US spreads will narrow in 2022.
  • Strong inflation and jobs data continue to point to the BoE raising rates in December, though Omicron worries add uncertainty to that call. We think the BoE will be gradual in raising interest rates with ‘quantitative tightening’ (i.e. shrinking its balance sheet) also playing a role in scaling back accommodation.
  • We don’t see the ECB and RBA raising interest rates next year, though the latter is likely to move well ahead of the former. We think the RBA will be done with QE by mid-2022 while the ECB is likely to reduce purchases after March but continue bond buying throughout 2022.


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Josh Nye is a senior economist at RBC. His focus is on macroeconomic outlook and monetary policy in Canada and the United States. His comments on economic data and policy developments provide valuable insights to clients and colleagues, and are often featured in the media.

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