Fairytale Ending

Image source: ShutterStock - New Africa, OlgaChernyak, irina_angelic CNuisin

What's going on?

Economists have high hopes for the global economy in 2022, but a lot rides on whether central banks serve something up thats too hot, too cold, or just right.

What does this mean?

Economists reckon the real that is, inflation-adjusted global economy will grow by 4.4%, driven primarily by the US, Europe, and Chinas respective 3.9%, 4.2%, and 5.3%. But theres a catch: that growth motivated by a recovery in consumer spending and a declogging of supply bottlenecks could continue to push up prices, which is why economists are expecting inflation to hit 3.5% around the world next year. That might encourage the Federal Reserve (the Fed) to hike interest rates as soon as mid-2022, even if the European Central Bank (ECB) has said its not planning to do the same until at least 2024. But if inflation keeps bearing down on the region, it might be forced to change that position pronto

Why should I care?

For markets: Whats a central bank to do?
The Fed is in a pickle: if the central bank makes borrowing more expensive by raising rates, it risks limiting economic growth as much as it does inflation. American shoppers only have so much cash to spend, after all, and theyre likely to buy fewer nice-to-haves if theyre confronted with expensive price tags. The Fed, then, needs to time its rate rises perfectly next year to enjoy the best of both worlds.

The bigger picture: Put down the dollar.
Goldman Sachs is expecting non-US stocks to do well next year, which doesnt bode especially well for the US dollar. A wider choice of potential winners could encourage investors to sell their dollar-denominated American stocks in favor of those denominated in foreign currencies, which would push down the formers currency versus others around the world.

Originally posted as part of the Finimize daily email.

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