The Three I’s Inflation, Interest Rates and Instability will drive the second half of 2022

If there’s one word that has caught everyone’s attention in 2022, it’s inflation. While recent signs suggest the worst may be behind us, inflation is still a major concern for ordinary citizens the world over and experts opine that it’ll likely be a couple of years before prices really come down from the highs they’ve seen this year. Many economists believe that low unemployment threatens to keep inflation high, which means that more aggressive rate hikes will be done. Since supply chain issues persist and plenty of instability remains due to the Russia-Ukraine War which has caused huge upheavals in energy prices, inflation will remain elevated. Moreover the world is expecting major recession thanks to the months of high inflation and high interest rates. Economists and Financial experts believe that higher prices are likely to last well beyond one more year, so the pain of soaring prices will continue for the people in the near future as well. If the pandemic slows down and the Ukraine war stops only then is the inflation expected to decrease and that too over a period of two years.

In view of the above the following scenario is likely in the second half of 2022 and first half of 2023:

Private Equity activity will slow down: Many deals in PE and growth equity which had begun in 2021 weren’t completed till as late as mid 2022. Investment activity has now begun to decelerate as investors are watching increase in inflation and rising interest rates closely. There has been a slow down in the deals because buyers and sellers or investment companies are not agreeable in terms of valuations for deals.

Fewer Initial Public Offerings (IPO): There is a huge slow down in the IPO segment. It remains to be seen how PE funds react to declining valuations, sell their opportunities and find strategic buyers. How ever the fact remains that inspite of the volatility there is a strong appetite for investment and diversification. Buyers and sellers inspite of instability are still trying to figure out the price discovery, as most fund managers will be at their wits end and under pressure to deploy the funds before the year end. So the rush for fresh allocation of funds is expected in early 2023 by most financial experts.

But experts agree that Tech sector has been the one bright spot in all this instability. Great leaps have been made in the tools used to onboard investors and communicate with them. The day-to-day of deal making in the private markets has dramatically changed for the better over the past two years.

UNCTAD expects the world economy to grow 2.5% in 2022. Prospects are worsening, with growth in 2023 expected to decelerate further to 2.2%, leaving real GDP still below its pre-pandemic trend by the end of next year and a cumulative shortfall of more than $17 trillion — close to 20% of the world’s income. The synchronised slowdown is hitting all regions but is ringing alarm bells for developing countries, where the average growth rate is projected to drop below 3%, a pace insufficient for sustainable development, further squeezing public and private finances and damaging employment prospects.

Under these circumstances, the report says, harking back to the 1970s or to later decades marked by austerity policies in response to today’s challenges is a dangerous gamble.The real problem facing policy makers is not an inflation crisis caused by too much money chasing too few goods, but a distributional crisis with too many firms paying too high dividends, too many people struggling from paycheck to paycheck and too many governments surviving from bond payment to bond payment. The multiple crises the global economy currently faces are connected by a policy agenda that has failed on its major promises to deliver economic stability and boost productive investment, both public and private.

With the warning signs flashing across a range of economic and environmental indicators, reclaiming the future with innovative, ambitious policies, political will and private and public support is a prerequisite for achieving ambitious development goals. The report lays out a strategy of increased cooperation among developing countries which, along with reforms to the multilateral architecture, could help shift the global economy in the right direction.