2022 Outlooks

COVID-19 is definitely still with us, but the economic impact is fading.

The pandemic continues to rage in some parts of the world, defying the comforts of high vaccination rates and confounding pronouncements that we may be nearing the exit. Europe is in the midst of its fourth COVID-19 wave, with the incidence skewed toward those countries and regions where effective vaccination is lightest; some lockdowns have been re-imposed.

The regional late summer surge in the U.S. has passed although the trough was higher than the previous wave and a new uptick has begun. Some countries in Asia-Pacific have begun to open up, although China retains a strict zero COVID policy. And a new omicron variant has been identified in South Africa, and it's spreading at a faster pace than delta.

While the spread of the virus has not been brought fully under control, its economic impact has clearly weakened. There are two elements to this story. First, for a given level of infections, measures restricting mobility have eased. This reflects governments having a higher degree of tolerance overall for COVID-19 infections, as well as being able to more precisely target and curtail certain types of activities.

As an example, skewing measures against unvaccinated parts of the population. Second, for a given level of mobility restrictions, the impact on consumption has declined (see chart 1). Households have redirected their spending power away from activities that are "locked down" (food and entertainment) and towards those where spending is still possible (durable goods). While the offset is not one-to-one, the reduction in consumption in mid-2021 was much lower and flatter than in 2020.



S&P Global Ratings believes the new omicron variant is a stark reminder that the COVID-19 pandemic is far from over. Although already declared a variant of concern by the World Health Organization, uncertainty still surrounds its transmissibility, severity, and the effectiveness of existing vaccines against it. Early evidence points toward faster transmissibility, which has led many countries to close their borders with Southern Africa or reimpose international travel restrictions.

Over coming weeks, S&P Global Ratings expects additional evidence and testing will show the extent of the danger it poses to enable us to make a more informed assessment of the risks to credit. Meanwhile, S&P Global Ratings expects the markets to take a precautionary stance in markets and governments to put into place short-term containment measures. Nevertheless, S&P Global Ratings believes this shows that, once again, more coordinated, and decisive efforts are needed to vaccinate the world's population to prevent the emergence of new, more dangerous variants.

2021 Legacy: Robust Rebound And Record Growth

Macro performance has generally exceeded expectations in 2021. The pattern has been driven by a combination of fiscal support, vaccinations and economic "gravity." These provide a useful lens through which to view the rebound. The first two of these factors tend to favor the advanced economies while the third has a larger influence on emerging markets. As we will argue below, the robust recovery has led to concerns about inflation.

Europe has been the latest strong performer, posting 9% annualized GDP growth in the third quarter (July to September). This reflected a Grand Re-Opening on the back of a strong vaccination push, fueled by the release of pent-up demand and rising confidence. This was not unlike the U.S. outturn in the second quarter of the year when vaccinations and confidence rose, although regional surges in COVID-19 and supply bottlenecks pulled down U.S. growth to just 2.1% in the third quarter.

The pandemic and its aftershocks will remain pivotal to credit prospects in 2022. Surging global demand, extraordinarily benign financing conditions, supply chain strains, and soaring energy prices are just some examples of the powerful forces triggered by the shock of COVID-19 and the emergency policy response it required. In S&P Global Ratings’ view, credit momentum will remain positive, with financing conditions still heavily underwritten by supportive fiscal and monetary policy, and economic growth easing back to a more sustainable pace. Nevertheless, the recovery’s foundations are relatively fragile and vulnerable to setbacks. The pandemic itself remains very much active, with the omicron variant posing a new threat and vaccination rates worryingly low in many parts of the world. S&P Global Ratings’ base case is that default rates will remain low and credit prospects continue to show improvement, but uncertainties abound and risk premiums are uncomfortably low.

S&P Global Ratings considers three sets of challenges and opportunities likely to shape the year ahead: Aftershocks assesses the immediate pressures largely brought about by the pandemic; Future Shocks focuses on more structural factors and emerging technologies shaping the future of finance; and Climate And Energy Transition discusses the credit implications of the behavioral and technical shifts stemming from efforts to avert the most severe consequences of climate change.

COVID-19’s economic impact has waned but variants are a concern. As we enter the third year of the pandemic, it is difficult to say with certainty that this will be its last. Successful vaccination programs and the ramping up of their global vaccine supply offer the clearest route out and the transition from a pandemic to an endemic but manageable disease. Yet ,sharply escalating case counts in heavily vaccinated European nations and the threat that omicron or other variants might overcome existing vaccines are reminders of how far we remain from a post COVID-19 world.

Amazon.com Inc., Walmart Inc. and other e-commerce companies are readying an arsenal of cost-saving measures as they prepare to battle inflation well into 2022.

While the largest retailers were able to provide a hedge against higher prices in the fourth quarter in part by stockpiling high-demand items ahead of holiday sales, market economists say labor and supply-chain constraints are unlikely to abate soon, indicating rising costs will continue into next year. Facing margin pressure, retailers are expected to navigate a challenging environment by reducing supply-chain inefficiencies, selling higher-margin goods, and passing some costs on to consumers.

With more than 30 GW of offshore wind power capacity under development along the US East Coast, power market participants are paying close attention to when these projects will begin delivering power into the regional markets, with several milestones expected in 2022.

Some large state-level offshore wind solicitation winners were announced in December, and those projects will be watched in 2022.

Massachusetts on Dec. 17 awarded the Mayflower Wind offshore project 400 MW of capacity. In 2019, the state awarded 804 MW of capacity for the project, a joint venture between Royal Dutch Shell subsidiary Shell New Energies US and Ocean Winds of Spain.

The state also awarded 1,232 MW of capacity to the proposed Commonwealth Wind offshore project Dec. 17. That is a joint venture between Avangrid subsidiary Avangrid Renewables and Copenhagen Infrastructure Partners. Avangrid, a subsidiary of Iberdrola, is also working on the nation's first federally approved offshore wind project, the 800-MW Vineyard Wind Project.



Also, on Dec. 17, the Maryland Public Service Commission awarded offshore wind renewable energy credits, or ORECs, to two developers that have proposed more than 1,600 MW of electricity to be built off Maryland.

The decision in the states' second round of offshore wind solicitations supports US Wind and Skipjack Offshore Energy in building separate projects, the Public Service Commission said. Denmark's Ørsted is developing Skipjack, which was awarded 846 MW, and the US Wind project was awarded 808.5 MW.

Additional project milestones

Federal permitting reviews will be important in the coming years as the Biden administration has set a goal of installing 30 GW of offshore wind power capacity by 2030.

The Bureau of Ocean Energy Management, which handles federal offshore wind leasing and permitting, currently has nine construction and operations plans under review.

BOEM has targeted Aug. 1, 2022, to publish a draft environmental impact statement for Dominion Energy Virginia's Coastal Virginia Offshore Wind Commercial Project in the Federal Register.

OPEC+ must confront the fallout from the new COVID-19 variant and a US-led attempt to lower prices by releasing oil stocks. S&P Global Platts Analytics sees the omicron variant potentially tempering oil demand growth to as low as 2.9 million b/d in 2022. The producer alliance's supply strategy for 2022 must navigate the impact of a sharp fall in Dated Brent from its mid-$80s peak.

While the roller coaster ride that US power markets have endured since the novel coronavirus pandemic took hold in March 2020 is not over, power forward traders may foresee a shortening of the hills and valleys by late 2022.

However, supply chain issues for materials such as steel and coal may tighten power markets more than forward traders realize.

The 2022 on-peak forward curves for four US hubs as of Dec. 22 show price rangers substantially smaller compared to year-to-date monthly average day-ahead on-peak locational marginal prices in 2021. The exception is California where drought, wildfires, extreme weather and high renewable penetration present higher risk.

The year 2021 was spectacular for US corn, with prices up nearly 45% year on year, and fundamentals suggest that US corn values are likely to be supported in 2022.

Tightening supplies, growing ethanol demand, and strong exports have provided support to prices which looks set to extend into the new year.

US corn prices touched multi-year highs during April-May. The March 2022 corn futures contract on the Chicago Board of Trade reached as high as $6.405/bushel and was back over $6/bu coming into the end of the year.

Even as the corn harvest in the world's largest grower concludes, prices managed to stay firm on continued demand from the ethanol industry and extended support from soaring fertilizer prices. Corn is the primary feedstock for ethanol in the US and nearly 40% of the country's corn output is consumed by the ethanol industry.

Fertilizer prices saw an unprecedented rally in the past few months following a surge in prices of key feedstocks and certain export restrictions put in place by supplying countries. Prices of all major fertilizers have shot up over the last year -- some have more than doubled. Since corn is a fertilizer-intensive crop, a rise in fertilizer prices leads directly to higher input costs for US farmers and complicates their planting decisions.



Fertilizer prices impact supply

According to S&P Global Platts Analytics, a 3 million acre shift from corn to soybeans is possible in the US, with both corn and soybean acreage at around 90 million acres in the marketing year 2022-23 (September-August), due to fertilizer price and supply constraints. Soybean is likely to become attractive as it has lower fertilizer requirement.

The global refined copper market is expected to be in a significant surplus in 2022, following a small supply deficit in 2021.

The refined copper market saw a deficit of 479,000 mt in 2020, according to the International Copper Study Group, or ICSG.

ICSG expects a small deficit of 42,000 mt in 2021, with 2022 supply forecast to exceed demand by a colossal 328,000 mt.

The 2022 surplus is based on the assumption of a 3.9% increase in refined output, the biggest increase in eight years, with copper demand expected to see a 2.4% increase, ED&F Man Capital Markets analyst Edward Meir said in a note Dec. 7.

Even though a rise in demand is anticipated, this will not be enough to absorb the increase in supply, Commerzbank's commodities analyst Daniel Briesemann said in a note.

Amazon.com Inc. and other U.S. e-commerce retailers are likely to pursue deals in 2022 that will further bolster their digital and technology capabilities, a move experts say will help them tighten their grasp on higher levels of online sales in the new year.

Amazon, Walmart Inc. and Target Corp. have emerged as beneficiaries of the pandemic, thanks largely to investments they have made in areas such as delivery, fulfillment and curbside pickup operations.