While post-pandemic recovery is expected to gain momentum in the coming months, there are, according to the Economist Intelligence Unit (EIU), 10 possible events/scenarios that could derail global growth and inflation in 2022 as well as ratchet up political tensions.
1 Worsening US-China ties
In its latest risk outlook report, the EIU notes that the US and China are vying for global influence. In an extreme scenario, this could lead to a neutral stance becoming economically prohibitive for third countries, dividing China-supporting and US-supporting economies. "Full global economic bifurcation would force companies to operate two supply chains with different technological standards," it says. – Probability: high
2 US stock market crash
The EIU notes that supply-chain disruption, higher energy prices, ultra-loose monetary policy and a recovering real economy have all contributed to a sharp uptick in US inflation in 2021. If slow monetary tightening fails to rein in inflation, the EIU says a rise in interest rates in 2022 may be necessary. "Given that US stock price/earning ratios are currently higher than before both the 1929 and the 2007-08 crashes, accelerated interest-rate increases could be enough to initiate a sharp stock market adjustment," it says. – Probability: very high
3 A property crash in China
The size of Chinese property giant Evergrande's debt means a potential default comes with a serious risk of financial contagion, the EIU says. Many of China's real estate firms are similarly overleveraged, which could possibly lead to a string of defaults. – Probability: high
4 Tighter financial conditions
Inflationary pressures stemming from rebounding commodity prices could trigger "interest-rate normalisation" which could feed into higher debt-service costs for governments, ratcheting up pressure for aggressive pro-cyclical fiscal consolidation that ultimately sets back the recovery of emerging countries. – Probability: high
5 New Covid-19 variants
The pace of vaccine rollout is the main variable behind more positive economic forecasts but more aggressive vaccine-resistant Covid-19 variants pose a serious risk to these forecasts, the EIU says. – Probability: moderate
6 Widespread social unrest
The pandemic has had a significant negative effect on incomes and quality of life, including in traditionally stable Western states and long-standing authoritarian regimes. "Countries where political tensions are already high appear to be especially at risk, but so are those whose economies were hit the hardest by the pandemic," it says. – Probability: very high
7 Conflict between China and Taiwan
Simmering tensions between China and Taiwan have increased in recent months. The EIU says Chinese aggression against Taiwan since late 2020 has raised the risk of a military conflict in the Taiwan Strait with the potential to drag in the US, Taiwan's backer. – Probability: low
8 EU-China ties worsen significantly
"The imposition in March of EU sanctions against China over human rights abuses in Xinjiang, and retaliatory sanctions from China against 10 EU individuals and four organisations, have led to a deterioration in EU-China relations," the EIU says. These developments may heighten European calls for EU-US cooperation over China. – Probability: moderate
9 Extreme climate events
The EIU warns that climate change models point to the risks associated with increased frequency of droughts. Intense heatwaves have struck Canada and the US this year. Greece, Turkey and Spain have suffered devastating fires in recent months. And volatile weather, including a drought in Brazil, has already contributed to rising prices for some foodstuffs. – Probability: low
10 An inter-state cyberwar
"Given the much higher costs of direct military conflict and the difficulty in identifying perpetrators of cyber-attacks, any military escalation is most likely to take the form of cyber-warfare," the EIU says. "The shutdown of a national grid, for example, would severely disrupt business operations, creating uncertainty that would weigh on investor sentiment." – Probability: moderate
