Susannah Streeter senior investment and markets analyst, Hargreaves Lansdown:
“The stock markets in 2022 are still likely to be sensitive to the spread of the Omicron variant, particularly for emerging economies, with many countries still unable to access the doses required to increase immunity against various strains of the virus. We don’t know how the latest covid contortions will change the overall global recovery picture. After an initial panic the financial markets are volatile but in wait and see mode. Early indications seem to show it may not cause more severe illness, particularly among jabbed citizens, but it has shown to be highly infectious, and many countries are now in another race against the virus, trying to roll out extensions to vaccine programmes to limit its spread. The weak GDP reading for October shows just how vulnerable the UK economy is to a fresh Covid shock, at a time when prices are continuing to climb.
“Stock markets in Europe, particularly in the UK and the US, are likely to stay highly sensitive to inflation and the reaction of central banks in terms of the direction of monetary policy. Given the push and pull effect of the dual worries about the virus dragging on growth and about stimulus programmes being rolled back too quickly to combat rising prices, it may keep a lid on valuations, squeezing exuberance out of the markets. Even though corporate earnings have held up well, markets have become hooked on the drug of cheap money and a rolling back of the huge bond buying drives, will lower liquidity in the markets.
“A warning shot that labour shortages may not ease soon has come from Jerome Powell the governor of the US Federal Reserve, the US central bank. He indicated that he thinks the recent rise in Covid-19 cases and the emergence of the Omicron variant poses increased uncertainty for how many people want to make themselves available for the labour force, particularly in face to face roles. That could intensify the fight for labour, pushing up wages and potentially lead to higher prices sticking around for longer. The snarled up supply chains all over the world which have also forced prices higher, don’t look set to ease significantly. The computer chip shortage is a big driver of delays and although new factories are being built to manufacture more, these will take years to construct so there is no quick fix to solve immediate issues. Consumers seeing incomes squeezed may be tempted to be more conservative in their spending, and not dip quite so deeply into savings built up during the pandemic, which could hold back growth. However the accelerated shift to digital ways of working during the pandemic may have been a costly outlay but is likely to have a deflationary effect over the longer term as new technologies lower labour costs.