Worsening US-China ties, sudden monetary tightening, emergence of vaccine resistant Covid strain top risks for 2022

The Economist Intelligence Unit, EIU says it expects the post-pandemic economic recovery to continue well into 2022 and while global GDP could expand by as much as four per cent, there will be wild variations in the pace of recovery across the different regions of the world.

In their report setting out 10 scenarios that could impact global growth and inflation next year, the EIU analysts provided some insights and analysis of the economic and political developments in an increasingly complex global environment and which can help business leaders plan better for 2022.

Top on the list of 10 likely developments with global impact is the high probability of a worsening in US-China ties which may force a decoupling in the global economy. The EIU said should this happen, it will have very high impact with a risk intensity ranking of 20.

According to the EIU, “the US president, Joe Biden, is trying to convince “like-minded” (mostly Western) countries to collaboratively put pressure on China. This has included restrictions in the areas of trade, technology, finance and investment, along with sanctions, forcing some markets (and companies) to choose sides.

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“Although most evident in the technology arena, there is a risk that this strategy will encompass industrial or consumer-facing sectors. 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.”

Following this closely is an unexpectedly fast monetary tightening capable of leading to US stock market crash with huge implications for the global market.

“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 stockmarket adjustment,” the EIU analysts said.

“The high number of retail investors means that falling stock prices would weigh heavily on consumer spending, possibly halting the US economic recovery and risking a recession. “

Scenario three is a likely property crash in China which could lead to significant economic slowdown for as the report said, “if worsening real estate sentiment leads to a string of defaults across China’s real estate sector, it will become much harder to contain.

“At the very least, this would lead to a collapse of property prices, with investment contracting, the government having to bail out overexposed banks and households, and in many cases household wealth taking a significant hit.”

This combination the analysts said, “could drive China’s real GDP growth to well below the 6-7% norm of recent years. Weak growth would, in turn, instigate a global economic downturn, with commodity exporters particular affected by a period of much weaker demand from China.”

The fourth scenario was listed as the high probability that tighter domestic and global financial conditions derail the recovery in emerging markets as the inflationary pressures stemming from rebounding commodity prices have already led some emerging markets, including Brazil, Mexico, Russia, Sri Lanka and Ukraine, to raise monetary policy rates in 2021.

According to the report, “in a context where sovereigns have grown increasingly leveraged as a result of the pandemic, interest-rate normalisation will feed into higher debt-service costs for governments. This could ratchet up pressure for aggressive pro-cyclical fiscal consolidation that ultimately sets back the recovery of emerging countries. In particular, the potential for US bond yields to rise faster than expected in the coming months could drive higher emerging-market risk premiums, leaving them vulnerable to sudden drops in capital inflows.”

Scenario five examines the possibility that new covid variants that prove resistant to vaccines could emerge thereby posing a significant risk to global economic recovery around the world.

Scenarios six and seven relate to the possibility of widespread social unrest around the world which can slow down post pandemic recover as well as the eruption of conflict between China and Taiwan.

The last three scenarios focus on a possible worsening in EU-China ties; severe droughts prompting famine in already vulnerable countries around the world and lastly interstate cyber wars capable of crippling infrastructure in major economic centres around the world.

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