I'm going to be telling you about our predictions at The Economist for what's going to happen in 2022. So I'm going to show you, I'm going to give you my Top 10. This is derived from our annual which I edit, it used to be called The World In… we've just renamed it this year to The World Ahead and you can see some previous entries are in the series there.

So essentially, this is written by my colleagues at The Economist, and this is the 36th year we've been doing it. We're joined by leading figures in politics, business, and the art. So we've got people like Cyril Ramaphosa, President of South Africa. I know we've got lots of people from South Africa on the call today and he calls for an end to vaccine apartheid for example.

We also have the cofounders of BioNTech telling us what they think's going to happen with mRNA vaccines next, and so forth. So we have lots of different predictions and analysis and opinions from different people, both inside The Economist and outside and what I'm going to do today is just sort of draw those together. I do this within the annual itself, there's a Top 10 trends in the Editor's Letter that I have at the beginning and I'm essentially going to do you a sort of summary of that.

There are various things that we know are going to happen next year. This is what we journalists called diary stories. So we know that, you know, Olaf Scholz is going to have taken over, probably in the middle of December, we know we're going to have various elections and anniversaries and sports tournament. So those are the sort of big tentpole things that we know are going to happen. The question is, what are the sort of things in between what are the big themes, so I'm just going to quickly take you through 10 of those.

Democracy vs autocracy

A really big theme that plays out in lots of areas is the rivalry between America and China in particular, and democracy and autocracy more generally. And this is a sort of reassertion of a longer-term mega trend, we hope we can see the light at the end of the tunnel with the pandemic.

And so you know bigger trends are sort of reasserting themselves, I think, like this, and like, the need to deal with climate change.

And next year is going to be particularly interesting, because we're going to have this very clear contrast between America and China and the way their political systems work. So we're going to have the midterm elections in the US, and we're going to have the Communist Party Congress in China.

And the midterm elections are going to be quite messy, there's going to be you know, all sorts of, it's going to be a sort of carnival of the way American democracy works, or doesn't work, depending on how you look at things.

And in contrast to that, we're going to have this very heavily stage-managed Party Congress in China, where Xi Jinping is going to be confirmed in power for several more years, normally he would be handing over to someone else at this point but he's not doing so.

And so you're going to have this sort of chaos of democracy in America, where the Democrats are very likely to lose control of the House and probably the Senate too and will have even less scope to do things and get things done.

And this will just sort of reinforce the Chinese Communist Party's position that democracy is dangerous and unstable and of course, Donald Trump is waiting in the wings and wants to come back and he will no doubt be heavily involved in the midterm campaign next year as well.

And this is all just proof as far as the Chinese are concerned that democracy is a bad way of doing things. And that actually having a central party with centralised control is the way to go. The East is rising, and the West is declining, as officials like to put it.

And I think we're going to see other elections around the world were, particularly in France, Brazil, and Hungary, where they're going to be seen as litmus tests for the health of democracy and the state of populism.

We're going to see this sort of French Donald Trump, Eric Zemmour as a contender in the presidential election, how much support will he get? How's that going to go? What's going to happen to Jair Bolsonaro in Brazil, again, a sort of test of whether populism has run its course. And then of course, what's going to happen with Viktor Orban in Hungary, where for the first time he faces a unified opposition.

So I think this whole kind of broader question of how whether democracy or autocracy are sort of better ways of running things. Joe Biden, in his first press conference as President earlier this year said that there's essentially a battle underway between the utility of democracies in the 21st century and autocracies. And he says, we've got to prove that democracy works.

People are worried not just about whether democracy works or not, or whether it might even be under threat, whether its survival is in question in the US, and it's not about just surviving, it's about showing that democracy is superior. So I think there's going to be a lot of this sort of reading into these political set pieces in 2022, wider points about whether democracy or autocracy is the better system for delivering growth, stability, and innovation.

Let's move on. One final thing to say there actually, is that there are potentially things where America and China could cooperate on things like trade, on things like climate, on things like cybersecurity or nuclear non-proliferation, but it seems quite unlikely that cooperation in those areas will happen in 2022 in particular, because it's in both countries interests not to.

Joe Biden won't want to do any deals with China that will make him look weak, being tough on China is one of the few things that Democrats and Republicans agree on. Xi Jinping is going to want to keep everything as stable as possible next year to ensure his own you know, transition to this the next few years of his rule. That said the need to preserve stability does at least mean that we think conflict over Taiwan or in the South China Sea is unlikely.

The pandemic in 2022

Okay, let's move on to the pandemic. Obviously, the Omicron variant is the big unknown here, but we think that generally the trajectory from a pandemic towards an endemic disease that is sort of broadly you know dealable with and liveable with will continue.

This chart here shows you the impact of the vaccines in breaking the link between cases and deaths and this is just data from the US and Israel but obviously they were countries that vaccinated quite quickly early on.

And you know, that's what we're seeing in the UK, we're seeing quite high caseloads, but this is not turning into equivalent numbers of deaths and hospitalisations as we saw in previous waves.

We don't know yet whether Omicron will break through more, you know, the nightmare scenario is that it's much more spreadable and much more virulent, so causes a lot more disease and death. We don't know, it's too early to say the sort of happy scenario at the other end of the spectrum is that it is more spreadable and outcompetes Delta but is actually milder.

And that would be sort of the next step along the road to this becoming an endemic disease that can be treated and is not life threatening and sort of moves it closer to being something like seasonal flu.

That said this is very, very uneven, we've got uneven access to vaccines, and it may be that Omicron is controllable if you have a good level of vaccination but is a real problem if you don't.

We should have some better vaccines next year second generation vaccines and also vaccines that could be delivered in new ways through for example, skin patches or inhalation.

And I think also very significant to watch out for next year are these new antiviral treatments from Merck and Pfizer. These are essentially pills that can be given to people who test positive, you take them for a week like a course of antibiotics, and you're then 90% less likely to become seriously ill or die.

And what's really interesting about these anti virals, the way they work is they essentially stop the ribosomes in the cellular machinery from replicating RNA, which is what vaccines do, they are RNA, and they just basically programme the machines to reproduce themselves.

And by blocking that mechanism, this is not something that is specific to particular strains or variants of Coronavirus. So there's quite high levels of confidence that those pills which seemed to work extremely well against the existing variants will work just as well against Omicron. So that could become a really important new weapon in our fight to suppress the virus and the new variants of the virus.

And I think, you know, a year ago, if you remember where we were, that we knew that vaccines were coming, we had these very promising results and we also knew that fast at home testing was going to be widely available, as it now is in many countries around the world. And both those things sort of sounded like sci fi, in November and December of 2020.

And we’re now in many parts of the world used to vaccination, you know, many of us in Britain have had our booster jabs now, we've got piles of tests downstairs, and you know, whenever we've got people coming round, or we're going out, we can do tests quite easily. And I think that's become quite normal for people in many parts of the world.

I think the things that are going to change next year, that sound like sci fi now, but, you know, we could see quite widely are these new forms of vaccine and these new antiviral pills. So fingers crossed that this will help us to move down the road, what this will probably mean, I mean, what does success look like here?

The sad truth is that there are still enormous inequalities here, as there are with many other diseases. And, you know, if you think of a disease like malaria, malaria is a minor inconvenience to people from the rich world, maybe they pick it up when they go to the tropics on holiday and if they notice it when they come back, then they get given some pills and it goes away.

Malaria, meanwhile, affects hundreds of millions of people around the world and kills millions of people every year. That is a reflection of inequalities in income and in health systems.

And I think the trajectory we are on is for Coronavirus to become just another disease in the sense that it's deadly and can be deadly if you're in the poor world and not if you're in the rich world. Sadly, the same is true of many other diseases.

What Omicron reminds us though, is what the Head of the WHO likes to say, which is none of us are safe until all of us are safe. And the danger of pockets of the world where new variants can still emerge really does remind us of the need to get vaccination coverage very, very widely distributed. And then to ask ourselves why it is that you know, if we can do it for one disease, we can't do it for others.

The economy in 2022

On the economy I'm not going to say very much because we've heard quite a bit. But yes, I would totally agree with this analysis that what we're seeing now with these higher prices and the spike in energy prices, is this rapid bounce back from the pandemic.

This chart here shows you the extent to which spending in the US shifted from services to goods. Essentially, consumers couldn't spend on services like holidays and going to restaurants and going to the theatre because of lockdowns so they spent the money that came through whether it was stimulus money or money they would otherwise have spent on services, they spent it on goods instead, that kept the economy going. But it meant that we had this massive shift towards goods and that has strained supply chains and pushed up prices.

And so you know, I think I my colleagues, who are economic experts would agree with the analysis that this is probably temporary and that these supply chain problems will ease. They point out that the factors that kept rates and inflation low in the past will you know, they still pertain and should reassert themselves next year.

The country we're actually most worried about, though, with a with stagflation or sort of wage price spiral is Britain. It is uniquely exposed to labour shortages, having closed borders to EU workers because of Brexit. We're also uniquely exposed to high energy prices, because we're particularly dependent on natural gas and we've just heard, you know, the price of gas has really shot up.

And we're also very exposed to the price of imports because we're a very open economy, we're very dependent on imports. So even before Brexit and the pandemic British inflation was higher and more volatile. And I think we're now uniquely vulnerable in the UK, to the forces that are dragging down growth and pushing up inflation. And that's even before you put Omicron into the picture.

Going back to the global picture, I think the real concern with Omicron is that once you've done that trick of firing stimulus at people and having them spend money on goods, instead of services, you can't do that trick again in 2022, because the supply chains for goods are already maxed out.

And that's what's really worrying that you know the movement the freedom of movement that there is to stimulate economies, you know, that we've pulled that lever once you've pulled that lever once it's not a lever you can pull again.

So 2022 really is a pivotal year in this and a huge amount hinges on what we learn about Omicron in the next few weeks. Because you know, switching to a world where we have sort of permanently higher spending on goods and less on services would be very painful.

The future of work

Let's move on to the future of work. Interesting to hear there's a general consensus that we're going to see hybrid working so more in the future where people are splitting their time between home and the office. But that's about as far as the consensus goes. There's an enormous amount of disagreement about the details.

Now I should preface all of this by saying that only about 50% of the population, even in rich countries can work from home. But for those people who can, there is a disparity between what their bosses want and what the workers want. Bosses generally like people to go into the office, bosses have nicer offices, bosses like being in the office, they get to tell everyone what to do, and workers are less keen on going it and so there's a disparity there.

And then there's also a disparity between what people say they want and what they actually do what their revealed preferences, when they are given a free choice.

So a lot of workers in surveys have been saying that they like the idea of you know, maybe work at home two days a week, and in the office three days a week, something like that, but you give them the choice, they actually stay at home four days a week, or five days a week, in some cases, go into the office much less often.

And all of this assumes that workers are sort of all the same and have similar preferences. And they don't, if you look at this chart here, this is from a survey of American workers. But you can see that there are disparities by gender and by ethnicity on whether people want to go back to the office or not.

There was an extraordinary survey by Slack that found that 3% of black knowledge workers in America want to return to the office full time versus 21% of white knowledge workers.

You can also see whether people have children or not affects whether they want to go back to the office, if you are involved with juggling childcare and work then flexible working, working more from home is something that appeals to you a lot more. And so the risk here is that there's a danger of unfairness if some workers go back to the office more than others and are more visible to their superiors.

And the sort of nightmare scenario here is that it's basically the young white childless men all rush back to the office and get the face time with the managers then they get all the pay raises and the promotions and then we see things like broader gender pay gaps, we go backwards on diversity, and so on.

And this would be the exact opposite of what people in some quarters were predicting when the great work from home experiment began in 2020. There was a lot of optimism back then, that it could lead to fairer and more equal workplaces, people talked about a Zoomocracy, where we're all equal in our little tiles in a video call, and where the pandemic was a sort of opportunity to address discrimination and inequality and revisit sort of processes and assumptions on lots and lots of levels.

It's now clear though that the hybrid workplace of the future will be unfair unless it's designed not to be. And that's going to take a while to work out it's going to require a lot of discussion and dialogue and we're going to sort of embark on that in earnest in 2022 I think.

There are also lots of other things about the future of work that need sorting out employment law needs updating, there are big questions about how much surveillance of people working from home people working remotely is appropriate.

You know, these programmes that monitor how many keys you're pressing or how much you're moving your mouse, and people are buying devices that make it look like they're moving their mouse when actually they're out walking the dog or whatever.

Health and safety requirements need looking at. I'm sitting in rather an old chair here if I get a bad back as a result, whose fault is it? And then there are tax rules, all of those bankers in New York who are no longer going to Manhattan to work but in adjacent states and those states are now starting to say well hang on a minute, maybe the tax revenue belongs to us and not to New York State.

And so I think there are an awful lot of arguments and questions and debates about the future of work that we need to work out and we'll be sort of moving down that road in 2022.

The techlash

Let's move on to the techlash. Techlash is a sort of backlash against big tech, is a term coined by The Economist, in fact in the annual a few years ago. And yet despite the lawsuits and the fines, the tech giants march on, and their growth and their profits seemed to be undented and I'm sure we'll see more lawsuits and more bosses being hauled up in front of government committees next year, and more scandals about bad behaviour.

But what's really interesting is the way that the discussion about techlash completely changed in 2021, because the Chinese government launched a brutal crackdown against its tech industry halting IPOs, banning video games during the week for kids, banning celebrities from social media in some cases, deciding that the entire online tutoring sector needed to be non-profit. And this has wiped about one and a half trillion dollars off the value of Chinese tech firms all under the cover of the pandemic and this was clearly something the government was planning, and the pandemic has provided sort of useful cover.

And Xi Jinping wanted to remind people who was boss, to some extent after some tech firm bosses got a bit too big for their boots. But he also essentially wants to change the direction of the Chinese tech industry and have Chinese tech firms focus more on hard tech, like artificial intelligence and quantum computing and robotics that give China a geostrategic advantage rather than frivolous things like food delivery or new kinds of online shopping.

And I think the big question is, will this work? If you look at the numbers, you can see that start-up funding for Chinese companies in the US it's shooting up and in China it's going down. We think it's much more likely to stifle economic dynamism, hamper innovation, reduce entrepreneurism.

Meanwhile back in America, America's politicians would never admit it, but they would love to be able to clobber their tech giants the way that China has. You can't do that in a democracy of course. Again, this is along with bashing China this is the one thing that Republicans and Democrats agree on that tech firms are bad and need to be clobbered.

So I think we'll probably see gradual tweaks of the rules in 2022, seems the most likely outcome, maybe new rules on privacy, on consumer data, online protection of children, tweaks to Section 230 on content moderation, the extent to which data can be shared between apps, and I think a lot of that actually, like GDPR in Europe, I think this could steer the tech companies away from some of their more egregious misbehaviour. But I think the threat of action is probably going to prompt as much change as action itself.

I mean, look at the way Apple is making it easier to repair its devices. And in fact, in the competition between these companies, it's the other tech giants that the tech giants are most worried about, and shifts in the technology, longer term shifts, that I think is more likely to reshape the tech landscape of regulation.

Crypto and the future of finance

Let's move on. Crypto and what's happening with the future of finance. I think crypto is sort of growing up the fact that regulators are trying to stifle it, shut it down and sort of domesticate it is a sign of it's being taken more seriously.

Essentially, what we're seeing here is three competing visions for the future of finance, the sort of vision of the traditional tech industry, big tech firms like Google, Apple, and Facebook, who have seen what Chinese firms have done like Alibaba and Tencent, and they've managed to build these big payment infrastructures, and these super apps that people can sort of spend their whole lives in. They can use them for all sorts of things that in the West, we're used to dealing with banks for, so you've got that vision.

Then you've got the kind of distributed finance crypto blockchain crowd who say no, the problem with that vision is it's all centralised. Look at the bad behaviour that you get from these big, centralised tech platforms, centralising everything into super apps is the opposite of what we need to be doing. Instead, we need to be doing all of this decentralised finance. And then you've got the central banks saying, well hang on a minute, if someone's going to issue digital currencies around here, shouldn't it be us. And so you've got Central Bank digital currencies, and China is furthest down that road.

We think that the fight between these three camps will intensify in 2022 and it will be the regulators who decide what the right mixture of these various things is going to be.

You know, this is very active debate about the best way to regulate crypto. Does it need a new regulator, crypto firms say yes, but that's just because they don't like the SEC, because it's boss actually understands crypto and is very, very critical of the industry.

So this is though I would sort of say suggest this is a movie we've seen before. You very often get this with radical new technologies and their supporters say this is going to change everything and then it gets domesticated, and some compromise is found between the old ways of doing things and new ways of doing things.

Central Bank digital currencies are not cryptocurrencies, they don't use blockchains, but they are very interesting, and they would grant Central Bank's superpowers, the ability to see what's going on in the economy, it would be much easier to cut interest rates below zero and much easier to pass stimulus at people if you want to do it. So, you know, there are drawbacks to them as well.

So I think this is a really interesting debate and we are going to see more of it, but it sort of reminds me of what happened with Napster, when Napster appeared 20 years ago and it was like really cool you could call up any music you like, straightaway from the internet. The problem was it was completely illegal.

And what this showed was there was enthusiasm for this idea of the jukebox in the sky and it then took several years for a legal version of the same thing with the same benefits to appear in the form of platforms like Spotify.

And I think that's what we're seeing now that crypto is very exciting because it allows you to, it does address some perceived problems with the existing ways of doing things and the question is, you know, how does that get domesticated?

The climate crunch

Let's move on to climate. We've seen more extreme weather in 2021. We've also seen the COP26 conference not really producing very much. And in fact, just when we're supposed to be cutting emissions, we've been turning coal fired power stations back on again, energy prices are shooting up because post Covid rebound has boosted demand for all sorts of things. So again, how long is this going to last?

Well, we think it will probably be a blip but even if it's short lived, there could be more of these crunches in the future.

And the real problem here is that the investment in new energy infrastructure is running at about half the level it needs to be, we need to be spending globally about $5 trillion a year on new energy infrastructure in order to reach net zero by 2050 and we're only spending about half as much.

So essentially, the answer to both of these problems, the short-term crunch, and the long-term problem of climate change is invest more money in this infrastructure.

That's not enough on its own though, globally we can only make progress if China decarbonises because it's the world's biggest emitter. So I think there's also an interesting question about how the West can cooperate with China on climate change, even while geopolitical tensions are rising. And there are areas we manage to cooperate on things like manufacturing iPhones.

So how can we cooperate in the same way and in fact in our pages in the annual this year, we have an interesting suggestion from Ma Jun, who is a leading Chinese environmentalist. His NGO has built a database that essentially maps the emissions of Chinese factories, and he says the way the obvious point of cooperation between the West and China on climate change is when Western firms who do a lot of manufacturing in China, when they're picking which factory to use, they could pick the lowest carbon producer of a particular thing using this database, and that would then put pressure on other providers to cut their own emissions.

And he's done this game before he produced a database of other kinds of pollution, not carbon emissions and methane emissions, but just other forms of pollution and that was very successful in reducing the amount of pollution from Chinese factories over the course of about a decade. So I think that's an interesting sort of model.

Are there ways that Western companies if the politicians aren't going to do very much yet, are there ways that Western companies can cooperate directly with Chinese companies to try and cut emissions?

The other thing to watch out for next year is this solar geoengineering experiment that the Harvard researchers want to do releasing dust from a high-altitude balloon to dim sunlight essentially, like a volcanic eruption does.

They want to release a whole two kilogrammes of chalk dust, not very much, you've probably been in classrooms with more chalk dust than that but it's hugely controversial, because this sort of sets the precedent that we should be figuring out how to do this.

The Harvard researchers are saying, look this is just a way that we may need to buy more time to cut carbon emissions, if we're not going to cut them fast enough, we should be at least figuring out whether this works at all, what the consequences are. So expect a big fight this experiment keeps being delayed because it's so controversial. But there's going to be another argument about that next year.

Travel in 2022

Very quickly, travel, we've still got some countries pursuing suppression strategies then unwinding them, but we've got lots of countries imposing new restrictions now because of Omnicron so very much up in the air there, we have seen travel starting to come back.

I think the big question in the longer term is we saw business travel didn't bounce back to its previous levels after previous crises after 911 after the global financial crisis, it's unlikely to rebound this time around because we've all got used to using video calling the technology is a lot better.

Bill Gates says he thinks half of business travel could be gone for good, but this is good for the planet, but it's actually bad for tourists because their tickets and hotels are subsidised by high spending business travellers. So again, that could be a sort of reshaping of the economics of the tourism industry.

The other interesting thing is that we're seeing is the sandbox strategy that's been pioneered by Thailand, where you're allowed into certain parts of the country before moving on to others.

So I think we're seeing some quite interesting innovative models here, as these various restrictions are introduced and removed and as we sort of have the whack a mole against new variants and we get new vaccines, and we get new treatments. I think we are seeing some interesting innovation and new ways of looking at things when it comes to travel and tourism.

The space race

Staying with tourism, space tourism it turns out is an anagram of come upstairs. Did you know that I didn't know that 2021 is the first year we've seen a lot of competition between space tourism countries, companies this year? 2022 we're probably going to see more people going to space as paying passengers than as government employees for the first time.

We've got this terrific rivalry between these private space companies, we've also got the more traditional rivalry between superpowers, China wants to finish its space station next year which will be permanently crewed. India is going to have another go at sending a lunar probe to the moon, the last one crashed.

And we've also got this rivalry to make films in space. Russia just sent an actress and a filmmaker to film on the International Space Station in October. Tom Cruise was also supposed to be making a film in space, but nothing seems to be happening with that.

So as with Sputnik, in this particular race it looks like the Russians will get there first and they'll get that movie out more quickly. There's also a real mission happening next year that sounds like a Hollywood movie but is a real movie, which is where NASA is going to crash a space probe into an asteroid to sort of practice defending the earth from rogue asteroids. So that should be a spectacular show later in the year.

Sport in 2022

And finally, sport, we've got the Winter Olympics in Beijing, and the World Cup in Qatar. And these are both obviously reminders of how sport can unite the world and that was wonderful with the Olympics this year. But these particular contests are also going to be reminders of how sport could become a political football. So expect protests and boycotts in both countries, or directed against the host countries in both cases.

We're already seeing some of this, you can't really do anything about protesting against China, they're not letting anyone in from foreign countries to watch the games which is very convenient but they using Covid as a pretext for banning foreign spectators altogether.

So instead, what we're seeing is protests against the major sponsors of the Olympics and they're getting called out in the west, you know are you do you really want to support the Olympics, why are you doing this?

Similarly, for the football, we've seen the Netherlands, Germany and the Norwegian football teams protesting against the choice of Qatar as host country. But in neither case are we going to see national teams actually pulling out of these contests, we just going to see a lot of sort of, I think protests and noise around the edge, particularly directed at the sponsors.

Okay, those are my themes and predictions for 2022. I hope you found that helpful. And now, we're going to open up to Q&A from both of us. Thank you for listening.

So for the benefit of those of you that might be watching this webcast recorded rather than live we're actually speaking on the morning of Tuesday, the 30th of November. And of course, following last week's discovery of the Omicron variant, the outlook could result in another disruption to full economic recovery and that really depends on the path of the strain, and how stringent the new restrictions will actually be.

This would be in addition to the measures imposed already by some continental European governments over the past couple of weeks to deal with an upsurge in Delta cases. And it's not yet known for sure whether the new Omicron variant is more transmissible if it leaves people with milder Coronavirus symptoms, or critically whether it's more resistant to the vaccines but that does seem to be the thinking of scientific community right now.

The Outlook for 2022

So against these many question marks yesterday, we published our own look ahead for next year, it's entitled The Outlook for 2022, “Transit to new normal but risk of delays". Our analysis here is largely based on the new Covid variant failing to have a long-term impact on infection numbers or hospitalisation rates, which now I admit is something of a leap of faith. But before we get the more precise roadmap of the way the virus will behave, it's very difficult to charter a change of course to the economy and policy.

In short, our main views are as follows. In terms of growth, we've had a decent year globally, as many jurisdictions have been catching up on economic activity as their economies have reopened.

We think in terms of world GDP, we're looking at something around five and a half percent in 2021. And for our baseline case, next year, we're looking for four and a half percent economic growth.

Probably the most important question and it's one we get the most questions on from clients is, whether the current burst of inflation is transitory or whether it's long term? So for example, we had news yesterday that German inflation shot up to 6% on the European harmonised measure. We think in brief that the current situation can probably best be described as the result of a massive post lockdown surge in demand which could not be met by increased supply and indeed existing inventories which have been run down.

You know, one good example here is the second-hand car market. If you look at prices here in the UK, or indeed in the US they are climbing by around 20% per annum, that is partly due to a shortage of new cars in short, because of problems with getting semiconductors. Those issues appear to be easing, especially in the specific automobile sector.

Of course, soaring energy costs are very visible. Beyond oil prices, which we all know about, there are a number of individual factors as well. So for example, those of you listening from outside the UK may be unaware that offshore gas prices here have gone up by a factor of four, which are pushing inflation up very sharply due to their impact on domestic heating prices. And in short again clearly areas of price pressure have been sharper, and they've been longer lasting than we thought a few months ago.

But in due course, markets should be able to work, and supply should respond to high prices, and inflation should moderate.

We seem for example, to be looking at shipping costs beginning to roll off their peak. This process is admittedly taking a while these things don't happen instantaneously and it is early days in that correction. But we think in those specific markets, that costs should ease back as 2022 rolls forward.

The great resignation?

The main question mark, and this is what we're most concerned about from an inflationary perspective is the labour market. And we're concerned about that in the context of inflation because in developed economies, it's extremely rare for inflation to be able to take hold without wages accelerating and looping back into prices.

And what concerns us, of course, is that there are a number of well documented labour shortages in various sectors, partly due to skills mismatches. But what we're also looking at is workers appearing to have withdrawn from the labour force.

So for example, if we look at the US situation, participation rates which is effectively the proportion of those people that are either in work or wanting to work, they're close to 2% lower than pre pandemic levels, and that comes to in terms of over 18s about 5 million people.

Now, we don't know if it's temporary, or if it represents something which we could call the Great Resignation, which is some workers retiring early, some people wanting different lifestyles perhaps.

In the UK there's a similar effect, we think is probably due to more younger people staying on for another year or two university, but we can't be at this stage 100% sure.

If what we're witnessing is actually a permanent reduction in the supply of labour, then wage pressure could actually extend beyond specialist sectors such as HGV or lorry drivers.

And we're then left trying to estimate how much extra pay pressure there is in the economy, and what the response of inflation is, and how central banks deal with that. That's a very big question mark we think for next year.

A working assumption though is that labour market dynamics are not going through a permanent shift. We saw participation rates fall in the US, for example, during the global financial crisis, and we saw a steady recovery, so it is a fair assumption to do at this time, we think. But in any case, we are concerned about some of the labour market metrics.

And in particular, the Federal Reserve's favoured measure of inflation is something called the employment cost index, that shot up by 1.3% on the quarter in the third quarter of this year 2021. That's a joint 30 year quarterly high. So repeat of Q4, and everyone's going to be recalibrating their pictures of the labour market and we may well have to rethink the transitory inflation story.

How central banks have responded

Looking at the policy response with central banks, obviously different central banks are responding differently. The main direction of travel, however, is that we're beginning to get tightening, or at least an unwinding of emergency monetary measures by a lot of central banks. Now, perhaps China's an exception here, Turkey certainly is an exception, it's cutting rates aggressively.

But if we look at the situation here in the UK, we think at the moment, obviously the Omicron situation notwithstanding, the Monetary Policy Committee is still probably poised to raise the bank rate in December by 0.15% to 0.25%. For now, we're still looking for the bank rate to reach three quarters of a percent by the end of next year.

And one point is to note that once you get to half a percent on the bank rate, which we think will happen in February this would result in the Bank of England not replacing its maturing gilts in its quantitative easing portfolio. That would be the first major central bank to unwind its QE.

Although we estimate this relatively small through next year, that's about 37 billion of gilts that would drop off from its total asset portfolio of 895 billion.

In terms of the US in November, the Federal Reserve announced it would start to reduce its QE bond buying by $15 billion a month in November and December from 120 billion a month. Really, depending on its Covid situation, we suspect the committee will accelerate this pace of tapering, so it is finished with QE by the start of March. And that would give markets a clear line of sight to begin raising rates at mid-year if still appropriate.

Central case we're looking three quarter of a point hikes in the fed funds target range, which would take it to 0.75 to 1% by the end of 2022. In the European Central Banks area, it's not about rates it's all about quantitative easing. Markets have priced in a modest risk of a hike next year, but we don't think that risk is actually material.

What we should see through 2022 is the end of the ECB's larger QE programme the PEP in March, and perhaps increasing its small if you like regular QE programme the APP to prevent a cliff edge in the number of assets that it buys. But in any case, we do expect QE to cease in the Eurozone at the end of 2022 and by that point markets could well be thinking about when the ECB is going to hike in 2023.

So again, just to say in terms of interest rates, we reckon that 10-year bond yields will go up to zero by the end of next year. We think the Euro will firm to around 120 against the US dollar by the end of 2022. Sterling we feel will benefit from an evolution of the global recovery and finishes the year against the US dollar at 148. That's quite a rally I understand from the current level of around 134.

All this of course hinges on the new Omicron variant having limited destructive capacity and essentially a contained set of measures from Western governments in terms of new restrictions. And of course, we know that a couple of continental governments have already imposed new rules prior to the identification of the new variant which extends to full lockdowns in certain countries such as Austria.

We do hope that the evolution of the world economy should continue to benefit from the Covid vaccination programmes which, as capacity pressures ease should reopen numerous possibilities for both entrepreneurs and investors.

Geo-politics

I would love to talk about politics for a bit. We've got midterm elections in the States where the Democrats are struggling at the moment, we've got a new German government about to take office, we've got French elections, we've got a new Italian president to be appointed.

There's lots but I think I've run out of time on that unless you'd like to ask questions in Q&A. Lots more I could talk about generally and you will find more detail in our Year Ahead our Global Economic Overview, looking to 2022 if you'd like to download it. But now, time to hand over to Tom Standage for his take on what lies in store over next year. 

What are the key possibilities created by digital disruption?

PS: We do have a number of questions so don't wind down too much. And the first one has come in, and it is to do with technology. And the question is, what are the main possibilities do you think created by innovation and technology in the 2020s generally?

TS: Well, I'm quite optimistic about, everyone has been very down on technology for the last decade, because the two big technologies that have emerged in the past decade, smartphones and social media were, you know, hailed as things that were going to lead to democracy and liberalisation in 2010, 2011 and they are now generally blamed for making the world worse. So we've got Donald Trump on Twitter, we've got our children addicted to screen, etc, etc. and so there's been this kind of big downer on technology.

And I think the wonderful thing about the mRNA vaccines is that they're a reminder of just how technology can help, and science and technology can make the world a better place and solve big problems.

And so that's a reminder of its potential and we now need to apply that to other diseases and to climate change.

The other interesting thing about the mRNA vaccines is that they appeared very quickly, or they seem to sort of appear overnight. But in fact, people have been working on that technology since the 1970s.

So my focus for the next year and for the next few years is what are the emerging technologies that people have been working on for decades, that are going to sort of appear as if by magic, and particularly in areas like fighting climate change?

So I think there are those are sorts of areas where I think we could do with big leaps in technology like we've had with the vaccines and those, that's what I'm crossing my fingers for that in the 2020s we will see big leaps forward in the sorts of technology that will help us fight climate change.

What will the economic impact of Omnicron be?

PS: Question come through, I think this is directed to me, but it's what do you think the economic impact of the new Covid strain will be do you see it pushing back interest rate hikes and cause another pingdemic as it's called in the UK, and that's where you get a text message from the authorities to say that you've been exposed to someone with the virus, and you have to self-isolate.

I think you know that the honest answer at the moment, as I think I tried to convey earlier is we don't really know yet. It really, I think a key is the extent to which this new strain is vaccine resistant. If it's not vaccine resistant, then I mean, largely, we continue as we did with the Delta variant. But as Tom was saying as well, there is some evidence, I think coming from South Africa, that the symptoms can be milder although I think that's been tested on younger people.

So the important thing is reducing hospitalisations and deaths, and also the treatments that are becoming available now seem to be very effective, as well. So I mean, it’s very early days, but we've got our fingers crossed and saying there is uncertainty, but we are not going to see a return to mass lock downs, right around the world.

And there might be some interruptions to certain parts of individual economies, but we hope that it's not going to be material and the world is going to evolve as we thought over the past couple of months.

Will wealth disparity cause more instability in the world?

PS: Another question coming through here, I think this is for me, but I'm going to ask Tom his opinion on it after I've answered it as well. You're not getting away with this one, Tom.

In a world of long-term interest rates, this has created a huge number of asset bubbles and worrying disparities of wealth globally, between rich and poor, young, and old. Do we think that if it's not dealt with this will spill over into social unrest and instability?

And, yeah, I mean that's certainly an unwanted side effect of keeping interest rates very low, the central bank's conducting quantitative easing when they are buying bonds and that actually pushes up the price of assets materially, and that we do have those discrepancies or growing discrepancies between the very well off and the less well off, and it's very difficult to know exactly how that's going to be addressed.

In the US, and in the UK, we have levelling up and build back better programmes to try and reduce those inequalities. It's debatable how effective those policies will be. But you know, perhaps one thing is that if we're looking at labour shortages, then pay growth goes up and that in itself could be one mechanism whereby those disparities are addressed, although that's not going to be a global answer.

And if we end up for example with in the UK pay growth averaging 3 or 4%, rather than 1 or 2% per annum, perhaps we end up with interest rates higher, but that might not be a bad thing, I think over the medium to longer term. Tom, what are your thoughts?

TS: If you look historically at what happens after crises, whether it's, in fact there have been several studies done on the impact of previous pandemics, and there is an increase very often in social unrest after them and it tends to happen, peak two years after the pandemic first appears so that would mean 2022.

And so that's rather worrying and it's because we've seen it absolutely with Covid, that pandemics essentially amplify and make more visible other forms of inequality, whether it's income inequality, whether it's access to health care, and so on.

And it's been for those of us who work in information businesses, who've got nice homes and nice, fast internet connections we've been able to cope with all of this much more easily than people who work in service industries or manufacturing, or whatever.

And then rich countries have been able to cope with the pandemic in ways that poorer countries haven't. So there is this, you know, I think we should be very alert to the historical precedent is that this does lead to political instability, and we should be aware of that.

What I think is interesting is that this time around the policy that has been put in place by Western governments is very different from what we saw after the global financial crisis. So the sort of we need to pay down the debt or we need to get our budgets balanced is taking a backseat to we need to make sure that unemployment is going down.

And I think that's a very good sign because that is austerity caused a lot of problems and is I think related due to the loss of faith that many people have had in democracy, it looked like the policies that were put in place after the global financial crisis were, they were not in everyone's interest. And so I think there are signs that things are being done differently this way.

Also, these post-Covid recovery plans do have sort of big job creation schemes, particularly around climate, which I think is very good, because Joe Biden talks about climate change as something that sort of means the creation of new unionised, well-paid jobs.

And so if you can use this as an opportunity to create new jobs and create new jobs in these new sustainable industries, whether it's going out and building wind turbines or installing millions and millions of car recharging points, those sorts of policies, I think, can also help.

So I'm sort of quietly optimistic that we might have learnt a few lessons on how not to respond to these sorts of crises from the global financial crisis and we might do a better job in some countries this time around.

Will geo-political tensions escalate in 2022?

PS: Okay, thanks, Tom. We're getting a number of questions coming through in volume now. So I'm going to try and lump a couple together to as we can. So, Tom, one for you on global political tensions. In short, what do you think of US,-China, Russia-Ukraine, China-Taiwan?

TS: Well, so our position on Taiwan is that we are worried about it but in 2022 the Chinese government is interested in stability, above all. So it's worried that you know, it wants to make sure there are no protests around the Winter Olympics, and it wants to make sure there are no protests around the Party Congress towards the end of the year.

So we think that sort of picking fights over Taiwan is not the kind of thing that is likely to happen next year, we're more worried about it after that.

But essentially, if you look at that virtual summit that Joe Biden and Xi Jinping had a few weeks ago, they both said it's very important that we reduce tensions, very important that we find ways to cooperate, but they then agree to disagree on absolutely everything.

So this is a sort of, you know, a stalemate, a frozen conflict, we don't think that the term Cold War is particularly useful. Some people call this a new Cold War because unlike the Cold War between the West and the Soviet Union, there was no trade to speak off between the West and the Soviet Union.

In this case, of course, that we have very tightly coupled economies and the iPhone being the best example of that so both sides have an awful lot more to lose. And so we hope that we will be able to find ways of cooperating just as we cooperate on manufacturing iPhones and other economic matters, that we'll be able to extend that cooperation into new areas, and climate is the most important of those areas.

Is AI fuelling the growth of autonomous weapons?

PS: Okay, I'm going to give you a couple of quick-fire questions now, I think some Tom to try and get through as many as we can. Next one is do you think that artificial intelligence is the PC edge of unarmed automated weaponry?

TS: The PC edge does that mean the politically correct edge. I mean, people are worried about autonomous weapons, you know fire and forget things where you basically outsource the decision to AI's and people are saying we need regulation around that.

In the same way that we have regulations and international agreements around chemical weapons and biological weapons and so on. I can see the case for that.

You know, AI is a general-purpose technology, it can be used for good things, it can be used for bad things, governments around the world are paying a lot more attention to it and coming up with regulations for it, the EU is the furthest down that track.

I think that's the right thing to do. But I actually studied artificial intelligence at University and I'm less scared of it than most people are, and I think generally, there are a few exceptions, but generally the more you know about it the more you are aware of its limitations.

And some of those limitations are very problematic when you get algorithmic bias, but for the most part, it's stupider than you think it is and to get good results out of it, you really have to fiddle with it quite a lot.

Will global migration continue to escalate and will nuclear power help with climate change?

PS: Okay, we've got a couple of questions that I can sort of put together on energy and migration. One question which you may remember the cover of an Economist in the early 1990s showing a picture of people clambering across the global map towards Europe and the US from elsewhere on the planet? How bad is migration chaos likely to get?

And if the UN and the EU are going to classify nuclear power as green how much will that help climate change mitigation and economic development over the next couple of decades?

TS: Let's start with nuclear because that's an easy one. We are fans of nuclear power at The Economist, and I think nuclear does have a role to play in the clean energy transition, its emissions free, and so on.

So what Germany is doing shutting down perfectly good nuclear power stations we think is crazy.

We, you know, there is a big problem with who bears the costs of cleaning up nuclear power stations at the end of their lives. But, you know, we're kicking lots of other things down the road with climate change, this is something we can, we should just be going for a lot more nuclear power stations now we think, and just do it.

In the long run, everyone sort of worries about them blowing up and people dying and all the rest of it, the number of people who've been killed as a result of accidents in nuclear power stations is absolutely tiny compared with the number of people who've lost their lives in coal mining over the years is microscopic. So we just don't think that's, it's the cost, it's the economics that are a much bigger problem, price carbon properly and suddenly that's much less of a problem.

TS: On migration. I mean, we have a particular view of that in Britain at the moment, because we have this situation that the government is sort of, on the one hand, trying to make sound terrible, but then it's making it sound terrible so it can blame it on the French.

I mean the number of refugees that we take in in Britain is absolutely tiny compared to other European countries, and we should be providing more ways for people to come to this country legally, so that they don't have to try crossing the Channel on boats and drowning in the process.

The difficulty is that when it comes to dealing with that sort of immediate crisis is it does, the only way to fix it is closer cooperation between France and Britain, and both France and Britain have governments that would prefer not to be cooperating. The British government wants to blame all this on the French, it's those terrible Europeans, they're the bogeyman, etc, etc, there're political reasons not to kind of deal with this in a serious way.

And similarly, Emmanuel Macron, it's very convenient for him to have the, to be able to blame this sort of thing, particularly if the British government has been childish, it's a very convenient political enemy for him as he faces re-election next year.

So unfortunately, the incentives for those governments to cooperate really aren't there and as a result, we're likely to see sort of more of the tragedies that we've seen in recent days in the channel.

Will air travel only return to pre-Covid levels in 2023?

PS: Fantastic, thank you. I think we've got time for one last question. I'm sorry if I haven't been able to ask all your questions here or answer them. One on the airline industry, back last year some airlines predicted it would be 2023 before air travel recovered to pre pandemic levels, do you think that looks too optimistic now?

TS: I think it does with Omicron. Certainly before the Omicron news, it still looked quite optimistic and 2024 looked more realistic. The other thing to remember is that when the airline industry bounces back from a crisis, it bounces back in a slightly different form.

So after both 911 and the global financial crisis, the overall level of travel increased, eventually after the bounce back but there was less business travel than there had been it only increased overall, because there was more tourist travel.

So I think the real question is the extent to which tourist patterns are going to have been permanently changed by the pandemic. Will people be more interested in holidaying closer to home in their own countries? Will we see more emphasis on short haul travel as people become more aware of the climate impacts of flying, and obviously, if that's the case, then you going to get sort of regional short haul airlines doing better than long haul routes?

And the other big factor here, coming down the pike is electrification and building green aircraft, it is possible to do it, but green aircraft are going to have much shorter ranges. So I can imagine that being able to do short haul with small numbers of passengers, you can do that feasibly with electric aircraft, but sort of massive, long-haul trips with very large numbers of people on board, there's no feasible way to do that using in a clean way that we can see at this point.

So that also does sort of push us towards maybe not staycations in our own country, but certainly more holidays in our own region and that has implications for the industry.

PS: Super thanks very much, Tom. I think that's just about all the time we've got for this session. I think we've had an incredible whirlwind tour around the world next year so thank you enormously Tom for those insights. And of course, a big thanks to everybody for attending. I think it's time to sign off for now. Hope everybody keeps well, and we hope to see you in 2022. Bye bye. And thanks very much.

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