Aviva Investors has forecast inflation will start to fall in 2022 after reaching a peak in the first quarter of the year.
In its outlook for 2022, Aviva suggested that inflation “is better described as persistent rather than permanent” with many of the reasons for higher inflation being well-known.
“Inflation has risen significantly higher than previously expected across the globe and presents a challenge to central banks everywhere,” the firm noted.
“It has been high enough for long enough to impact both sentiment and behaviours.”
Aviva said that it expected Australia’s trimmed mean measure of inflation will remain in the lower half of the Reserve Bank’s target range of 2 to 3 per cent throughout 2022.
The firm believes the RBA will look to raise interest rates in early 2023 rather than this year but warned that this may be brought forward if the more advanced wage and inflation dynamics seen in other countries start to emerge in Australia.
Globally, the economic recovery will be somewhat slower in 2022 but still historically robust according to Aviva.
“Strong household and corporate balance sheets should support the ongoing expansion and post-COVID catch up,” the firm said.
Global GDP growth is forecast to remain above average with a rise of more than 4 per cent in 2022 after a rise of more than 6 per cent in 2021.
While newer variants of COVID-19 present some downside risks, Aviva expects these will be temporary and will defer growth over time rather than leading to permanent losses.
“The combination of a fading pandemic, strong growth and persistent inflation means that emergency policy settings are no longer needed and that central banks will tighten monetary policy slowly but steadily in coming years,” Aviva said.
Aviva Investors head of investment strategy and chief economist Michael Grady said the prospect of rising rates would favour equity over credit.
“We retain a moderate positive position on equities, funded by an underweight position in credit, since equities generally fare better than credit in the middle stages of the business cycle,” he said.
The firm expects underperformance from emerging markets compared to developed markets due to a range of headwinds including slower growth, monetary policy normalisation and the risk of higher real rates.
“We maintain a negative stance on government bonds because of upside risks to inflation as well as the tightening bias from global central banks,” noted Mr Grady.
“Rate hikes could happen faster than markets currently believe and expected terminal rates look potentially underpriced.”
After a year of rising inflation, Lifespan Financial Planning senior investment specialist Brian Long recently warned that inflation now needed to be seriously considered.
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
