Report suggests demand-driven inflation is here to stay

IG Wealth Management believes a milder momentum in the economy is likely to continue into 2022 following a year of COVID-19 vaccines and monetary support from governments that contributed to a stronger economic growth than first expected. 

"After the rapid reopen in 2021, we're embarking on the path to normalization in 2022," said Philip Petursson, Chief Investment Strategist, IG Wealth Management. "Investors should expect generally positive equity markets and a higher interest rate environment, with inflation higher than we've experienced in the last decade." 

IG’s 2022 market outlook has identified three main themes for the year ahead, the first of which is a transition from a rapid to a more normalized economy.

Next year predicted to see a slower rate of growth in economy 

While 2021 saw a period of accelerating economic growth, 2022 will see a moderation of that growth, said the report. This does not mean low growth, but rather a slower rate of growth. The combination of a tighter supply chain, low inventory levels and higher demand for goods indicates economic strength instead of weakness. “In short,” said the company, “the report concludes that the Canadian (and global) economy should remain healthy in 2022.” 

The second theme is that equity market returns will be much closer to average following a strong year in which those markets were driven by resurging earnings growth, low interest rates and plenty of liquidity. "Coming from the 20 per cent-plus gains in 2021, investors shouldn't be surprised if returns are more moderate and in the mid-single-digit range in 2022," observed Petursson. 

2022 expected to be a challenging year for bond investors 

The third theme is that demand-driven inflation is here to stay. That means central bankers will have to catch up, and it also signals another challenging year for bond investors. A diversified approach to fixed income, including areas with higher yield potential, may provide a higher return potential while balancing out interest-rate risks. 

"Overall, 2022 looks to be an extension of 2021, but perhaps milder," concluded Petursson. "The equity bull market is likely to march on, just at a slower pace. And interest rates should continue to move higher, commensurate with prevailing inflation.  The big wild card is how central bankers will respond to this new, inflationary environment that hasn't been seen in decades."