‘Money is going virtual’ and other important themes to watch in 2022: Macro analyst

Atlantic Council GeoEconomics Center Director Josh Lipsky joins Yahoo Finance Live to discuss which Fed decisions may ultimately affect the overall 2022 outlook, interest rates, central bank-backed digital currencies, China, the Olympics, and the supply chain.

Video Transcript

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ZACK GUZMAN: Well, we are just a few days into 2022. And already, I think it might be worth looking at what's to come. Because it sometimes feels like in the pandemic that time is lost and it's hard to keep track of exactly what is important to watch. But luckily for us, a list of the top stories to watch here in 2022, including the likes of watching the boycott shaping up at the Olympics in China and the explosion of central bank digital currencies now floated at multiple central banks around the world.

And for more on that, I want to bring on Josh Lipsky, Atlantic Council GeoEconomics Center director here with us with a closer look at what made your list, Josh. And I guess you can start with kind of what's Du Jour today when we're talking about the Fed and there are three interest rate hikes planned for 2022. And you're in the camp too that it might be tough to get there, given kind of the growth slowdown that we're expected to see.

JOSH LIPSKY: Exactly. Yeah, I think the Fed is what's on everyone's mind right now. Of course, what we heard in December, penciling in the three rate hikes. And then the minutes that came out yesterday. I think that's ambitious, three rate hikes. And I wouldn't say that that's even my base case of where things are.

And a lot of people have made the arguments as to why Omicron, other issues, inflation may be coming down a bit. But I look at the history. If you go back 30 years when rate cut regimes have begun, whether under Greenspan or under Yellen, the economy has been accelerating from the previous quarter. That's not going to be the case in Q1 2022 compared to Q4 of 2021.

We're actually going to be decelerating. We're going to have moderating growth in 2022 compared to the rebound year in 2021. So just from a historical perspective, what the Fed is then saying is that they're going to hike three times into an actual slowdown-- still growth, but slower growth than the year before. And that's why I think they're going to have that first rate hike, the one that says, hey, we're serious, we mean it. But the other two are very much a question mark for me at this point.

- Yeah, that's interesting. And you highlight that risk, Josh, in terms of a potential slip-up with the timing of these rate hikes. The Fed, of course, not the only major central bank that's looking to tighten and hike. We're looking over in Europe as well with the ECB. When you look at all the major central banks, what is that tightening cycle ultimately mean for expectations of global growth in the year ahead?

JOSH LIPSKY: Yeah, it's a great question. And, you know, we've had these sort of global easing cycles. I'm not sure that this is going to be a unified global tightening cycle. It's going to be very fractured. The ECB has said and Kristine Lagarde have said that they are going to move much more slowly on tightening than the Fed. I think you saw that sort of division emerging in December and I think you'll see it even more clearly in February and March. And so you're going to see the growth picture follow that different easing cycle picture. And it's not going to be this unified rebound we saw in 2021. It's actually going to be very different compared to Asia, Europe to the US.

ZACK GUZMAN: Let's stick with central banks too, though, because as you've kind of been doing a great job tracking the rise of all of them, trying to figure out cryptocurrency, watching the rise of that and saying, hey, look, we should probably get on this ourselves. And so, of course, we've been tracking the Fed in what they've been trying to do, China unveiling their own as well around the Olympics. So what are you seeing there in terms of how they're trying to tap into that growth too?

JOSH LIPSKY: Well, this is one of, I think, the most important stories for 2022. Money is going virtual. And this is not just the China story. And this is not just a cryptocurrency story. This is a central bank story.

There are now 90 central banks representing 94% of the global economy interested in developing a central bank digital currency. And if you think of the big four central banks-- the Fed, the ECB, the Bank of Japan, the Bank of England, the Fed is unfortunately the furthest behind of those four.

And there are models proliferating all over the world. South Korea is now pursuing a pilot that uses distributed ledger technology. The Riksbank, the oldest central bank in the world, has a pilot program. And so people are going to change the way they interact with their governments and interact with finance in 2022. And I'm not sure we've fully processed that in the US because we're unfortunately lagging behind.

- Yeah, and, certainly, it's not just the China story. But we've talked so much about them because they have been the leaders in this space. We saw just today, or I think yesterday, WeChat now supporting the digital Yuan. We're talking about 800 million monthly active users on WeChat Pay alone. How does that accelerate things for China as they look ahead to really give the global rollout come Beijing Olympics?

JOSH LIPSKY: Yeah, this is going to be the coming out party for the digital Yuan in early February at the Beijing Olympics. Already we 10% of the citizens of China have opened up e-yuan wallets. And now with the app more widely available, it'll probably scale up to 20% or 25% within the next six to eight weeks. That is massive growth in terms of hundreds of millions of users.

But remember, this is a domestic-only product right now. This can only be used internally in China. And the question coming out of the Olympics with these international athletes coming, will they use it? Will they be able to use it? We believe you can open it with just your passport number.

And then what happens on the back end? Can you take it back home? Of course, right now the answer is no. But are the Chinese officials and the People's Bank trying to figure out a way to make this cross-border?

And if you look what we track at the Atlantic Council around the world, the cross-border testing of digital currencies is really a fascinating story for 2022. And, again, not just China, but Australia is doing it. South Africa is doing it. Countries are partnering and learning with each other. And, again, the US is not in that game right now.

- On the issue of China, you've highlighted this growing divide that we're seeing between how governments view the risk in China versus how businesses do. And you've highlighted the fact that those sponsors have stuck around for the Beijing Olympics, names like Airbnb as well as Intel. They haven't necessarily spoken out against China's human rights abuses. But I wonder if you think business can continue to operate under this assumption that the market and the growth opportunity there is going to sort of dictate where they move and how they move in China when we're continuing to see the blowback from consumers, especially in China, become more significant.

JOSH LIPSKY: Yeah, it's such a great point that I think this disconnect is not really realized. You know, we talked about 30% of the world by GDP doing a diplomatic boycott of the Olympics. But 0% of the world's major companies who are the top sponsors of the Olympics are boycotting. And look at what Tesla did just the other week in terms of opening up the showroom there. So companies aren't feeling the pain right now.

But back to the digital currency conversation, think about this as a company trying to operate in China. Imagine that you now have to accept digital Yuan. And imagine at some point the Chinese authorities become cross with you because of something you said back home about what's happening in Xinjiang, for example. They would now have a shut off mechanism available to you very quickly to make sure no payments could be made in country to your company.

And so the warning to multinationals is, be aware. Be aware of the risk you're taking on operating here. And, yes, there's profits to be made. We all understand that. And there may not be a price to pay immediately. But that doesn't mean there won't be a price to pay in the medium term.

ZACK GUZMAN: Now Josh, the other one too that is interesting-- and China is a good example of this-- all roads seemingly leading back to China when it comes to the top stories to watch. And maybe that's been the case for a while. But when we look at data privacy-- and, really, I guess the story around that shoring up and maybe making sure that some of their data doesn't leave the country. We've seen some other countries pursuing the same kind of policies.

I mean, how important is data going to be-- maybe not just in 2022, but years beyond. And I do wonder if maybe crypto comes into that when we think about how maybe users can start profiting or, dare I say, controlling a bit more of their data. There have been some interesting innovations there too.

JOSH LIPSKY: Yeah, you know, there's two ways to think about it. Because one is we've all been experiencing this real time data revolution in macroeconomics over the past 18 months in the pandemic. How are people spending their money right now? OpenTable reservations just as one sort of economic indicator we weren't thinking about as much two years ago.

But China is thinking about shutting some of that down. We've been tracking their ships. That's been important for our understanding of supply chain countries. They don't want that anymore. They don't want to share that information anymore. And they're not the only ones. There are similar laws, data privacy laws across Southeast Asia now. And I think that's a real warning sign for folks who have been relying on that kind of information and basing their models on that kind of information. Countries are no longer comfortable sharing it. That's going to be a change in the way we operate and forecast in 2022.

And then on the digital currency front, if we know, if central banks know how people are spending their money-- and that's one of the opportunities with central bank digital currency-- that's real time data as well. If you understand the macro trends happening within your economy and how money is getting spent, there's a tremendous opportunity there. But privacy has to be protected. That's why the Western countries are so far behind in this conversation and countries like China haven't worried about that as much in their rollout.

ZACK GUZMAN: Josh Lipsky, Atlantic Council GeoEconomics Center director, I appreciate you coming on, man, all fascinating things and a lot really to focus in on in 2022. Thanks again.