The year 2022 was a historic year, both for the levels of inflation that reached almost everywhere, and for the devaluations of financial assets, with the main emphasis on developed markets.
These historic imbalances began to be felt after the economic, fiscal and governmental response to the covid-19 pandemic reached planetary proportions.
Supply constraints emerged as a countervailing force to the recovery of economic activity and boosted inflation.
The reopening of economies created disruptions in the global demand for goods and services, supplier delivery times rose to historic highs and industrial production began to suffer from this and weakened globally in 2021.
Spending by economic agents on goods and services, fuelled by government aid, increased in advanced economies to levels above those seen in the pre-pandemic period and continued this upward trend for much of 2022.
In 2022, in addition to the perpetuation of supply chain constraints, with continued exacerbated logistics costs and container shortages, a new event added to the complexity of economic development – the War in Ukraine.
The outbreak of war between Russia and Ukraine boosted the prices of energy and food commodities around the world, especially in Northern and Eastern Europe.
These increases, which were increasingly significant, were distributed throughout the production chains and economies, causing the cost of living to rise a little everywhere. The Consumer Price Indices (CPI) rose to levels well above the reference limits set by the Central Banks of countries or regional blocks, and for Europe and the United States, which have reference limits set at 2%, annual inflation reached values four times greater than the limits.
During the year, the main Central Banks adopted contractionary monetary policies, with violent and continuous rises in reference interest rates, as a way of curbing the high and galloping levels of inflation
The covid-19 pandemic itself became an issue again in 2022, even after a massive worldwide vaccination programme, with growing doubts about the effectiveness of the vaccines.
Just when it seemed to be ceasing to be a problem or not deserving of the projection it had had in 2020, China again recorded significant cases of covid-19 and again adopted a ‘Covid Zero’ policy of “find, test, track, isolate and support”.
This has reduced aggregate demand and consumption in Asia’s largest country, helping it to be one of the few countries in the world to have controlled inflation – 2% – below the 3% reference limit.
During the year, the main Central Banks adopted contractionist monetary policies, with violent and continuous rises in reference interest rates, as a means of curbing high and galloping inflation levels.
These restrictive policies led to an accelerated rise in yields throughout the year, which caused investors to flee the equity markets, resulting in historic losses in the stock indices.
Last year was marked by the war in Ukraine, with a negative impact on the global economy
The widespread 60% / 40% (60% Bonds – 40% Equity) asset allocation strategy, which for years has shown resilience to shocks and an efficient diversification for different economic cycles, had a record negative result, only seen for more than 150 years!
Both Bonds and Equities showed strong devaluations, a fact only seen on three occasions in the last 100 years. With this behaviour of the international financial markets, it was not long before the first signs of recession began to appear. Economic activity began to slow down as a result of successive rate increases.
However, the main global economies continue to show a healthy resilience, motivated by the still high level of monetary liquidity in the financial system.
This resilience facilitates the work of Central Banks, which may be tempted to tighten monetary policies a little further, with the aim of significantly reducing the current level of inflation. Another trend seen during 2022 was the retreat of the globalisation process. The war in Europe and the covid-19 pandemic have led to a disconnection between countries, a trend that could widen the differences between the main economic blocs.
The International Monetary Fund (IMF) recently published a report that addresses the current trend of fragmentation in the global economy and argues that this trend could cost up to 7% of global GDP in the coming years.
Fragmentation will be an added challenge for many of the vulnerable emerging and developing economies, which have been hit hard by multiple shocks in
recent years. If this situation is not reversed, the developing world risks “falling further behind”. The Fund recommends three approaches to reversing this situation, these being strengthening the international trading system, helping vulnerable nations manage sovereign debt and stepping up climate action.
For 2023 one thing is positive: the base we are starting from is much lower, and monetary policies may start to be felt in the fight against inflation, which gives confidence to say that, although the risks are still very visible, the year will not be as difficult as the historic year 2022 was.
In Mozambique, expectations are even more positive, with the possible resumption of gas projects in the north of the country, and with inflation falling to single digits, opening space for the Bank of Mozambique to be able to revise the metical’s reference rates downwards.
