This Article is From Jan 09, 2022

Ruchir Sharma's 10 Big Trends For 2022 Economy

For the second year, the pandemic reshaped the world - not changing everything, but accelerating many things, from population decline to rising debt and digital revolution. Here is how these trends could define the fortunes of the world, and of India, in 2022.

1. Decline in birth rates accelerates: Couples had ample opportunity but apparently lacked desire to bring kids into a shut-down world. Declining birth rates have been lowering global economic growth, and fell at a faster pace during the pandemic. As the virus spread, birth rates fell nearly 4 percent worldwide, including a dramatic 15 percent drop in China. China's working age population started shrinking around 2015, and now its total population is on track to start shrinking this year or next - many years earlier than most forecasters expected.

In India, even before the pandemic hit, the birth rate had fallen below the global average for the first time. Though national birth rate data is not yet available for India during the pandemic, early numbers from Mumbai indicate a fall on the order of China's, with births per 1,000 residents dropping to 101 in 2021, down from 120 in 2020. Once seen as the epicenter of the global population explosion, India too is now seeing a baby bust. The critical point for India's economy: countries with weak population growth cannot sustain GDP growth in the super-fast range of 8 to 9 percent. Historically, that simply hasn't happened.

2. China's economic power peaking: Slowed by the baby bust, rising debt and government meddling, China accounted for a quarter of global GDP growth in 2021, down from a third before the pandemic. China's increasingly sharp turn from trade to "self-reliance" is loosening its ties to other economies.

Near perfect five year ago, the correlation between GDP growth in China and other emerging countries, including India, barely registers now. Alongside South Korea, India is also one of only two emerging countries that has seen trade with China decline as a share of its GDP in recent years. To be clear, China still matters for growth in India and the world, but not as much as it once did.

3. Global debt trap deepens: Mounting for four decades now, global debt grew even faster during the pandemic, driven by government borrowing. 25 countries including the US, China and Japan have total debt above 300 percent of GDP, up from zero in the mid-1990s.

In India, the story mirrors the global trend, with a surge in government borrowing last year pushing up the nation's total debt from around 160 percent to a peak of 185 percent of GDP, before falling back to 175 percent. While that burden may look relatively small compared to, say, China, it is in fact concerningly high for a comparatively low-income nation such as India, and this type of credit binge often leads to trouble. The one bright spot: most of the debt is in rupees, meaning India owes the money to itself and not to foreigners, which is an even more risky form of borrowing.

Money printed by central banks continues to inflate global stock and bond markets, which were the same size as the global economy in 1980 but are now more than four times larger. This deepens the debt trap, making it difficult for governments to raise interest rates and dial back the flow of easy money for fear of triggering bankruptcies and market contagion.

4. Inflation will rise but may not hit double-digits: Population decline implies fewer workers and higher wages. Deglobalization of trade, money and people flows implies less competition. Slow productivity growth raises costs, and the spread of populism cuts any appetite for spending restraint. All these forces are pushing inflation higher, but possibly not to the double-digit levels of the 1970s, as some forecasters fear.

The unusually high government stimulus spending of 2021 should ease in 2022, as should the worst price spikes of last year, which were concentrated in transport and lodging. Technological changes will also continue to put a lid on prices.

India is, for once, an inflation outlier in a good way. In the United States and worldwide, inflation is running at least twice as fast as forecasters expected, but in India, at the consumer price level, it is running slower, and has fallen below the global average inflation rate for the first time since 2005.

The bigger risk is asset prices. Financial markets have grown to more than four times the size of the global economy, and when markets crater, deflation often follows - as Japan learned the hard way in the 1990s.

5. Greenflation: It's well known that the fight against global warming is raising demand for green metals like copper and aluminum; less well understood that green politics is greatly reducing raw material supplies of all kinds. Over the past five to ten years, investment in new oil and mineral production has fallen by more than 50 percent, as local and national governments resist construction of new production facilities, and investors shun fossil fuels.

The result is "greenflation" in commodity prices, which just saw their biggest yearly increase since 1973. India is among the larger net importers of commodities, which makes it one of the nation's most vulnerable to greenflation.

6. Productivity paradox persists: Hope has vanished that rapid adoption of digital services during the pandemic would end the long decline in global productivity growth, which has dropped from 5 percent in the mid 1960s to 1 percent today. A 2020 surge was confined to the United States, and petered out late last year. One recent study of 10,000 employees in Asia found that those working from home put in nearly 20 percent more hours, but with a slight 0.5 percent decline in output. The paradox persists of weak productivity despite accelerating technological change.

One explanation goes back to rising debt, which is fueling a worldwide rise in zombies, or companies that do not earn enough to make even interest payments on their debt. In India, the zombie class has actually been shrinking a bit in recent years, but by some estimates still represents around 35 percent of listed companies. 

7. Data localization: The virus hit a world turning inward, with declining flows of everything (trade, money, people) except for data. Internet traffic in 2022 is likely to exceed all flows through 2016, with a twist. Defying hopes that the internet would evolve beyond government control, authorities are successfully filtering data and blocking it from crossing borders, effectively deglobalizing data, and localizing national networks.

Some are following China's lead, controlling data for political reasons, others are following Europe's lead, regulating data with an eye to protecting individual privacy. The most restrictive data regimes are arising in emerging countries led, according to the Organization for Economic Cooperation and Development, by China, Saudi Arabia, India, and Russia.

8. Bubblets deflate: While this has been called the era of the "everything bubble", a few assets do show classic bubble signs, from prices doubling in a 12-month period to manic trading. These bubblets grip popular cryptocurrencies, clean energy, the surprisingly large share of US tech companies that have no earnings, and SPACs or so called "blank check" investment companies.

Over the past year, all these assets witnessed a fall of 35 percent or more from the peak, a line beyond which bubbles rarely recover. Typically, they continue falling for around two years, and bottom out at an average of 70 percent below the peak. A silver lining: tech-oriented bubbles often leave behind a few potentially giant survivors, and all these bubblets involve new technologies.

9. Small investors' mania cools: Retail investors rushed into the 13th year of the global bull market, and excited late arrivals often signal the party is ending. From the United States to Europe, new and often young investors have been opening trading accounts, buying stock and, most dangerously, borrowing to buy stock, at record paces. Worse, retail buyers are still overwhelmingly enthusiastic at the same time that selling by corporate insiders is peaking. And corporate insiders have a much better track record: they tend to sell at the peak.

In India, the number of active retail investors tripled in just the last two years from 11 million to 30 million. Retail investors now account for nearly 60 percent of trading volume, up from less than 40 percent on average in the years before the pandemic. Such mania rarely lasts, suggesting that even if the stock market as a whole is not at risk, the names most popular with retail investors likely are.

10. Physical world is still more important than the Metaverse: In 2021, rising hype for the metaverse seemed to spell decline for the physical economy, but demand trends indicate otherwise. Digital natives need physical shelter too. New demand from millennials helped inflate housing markets in 2021, and is one of the factors pushing up car prices. Electric cars may be a lot smarter than older gas models, but they also consume far more copper. Behind every avatar is a human, and labor shortages are lifting wages even in jobs most threatened by automation, like truck driving. Requiems for the tangible are premature.

(Ruchir Sharma is a global investor and an author)

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.

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