The economy is emerging strong from the biggest annual recession in decades. Forecasts hold that in 2022 global GDP growth will slow down, but it will remain solid, being able to reach a rate of change of 4.1%, according to forecasts by the Economist Intelligence Unit (EIU). However, the risks that could ‘crush’ this forecast are many and very real. A good part of them, even, could already be gestating. EIU economists see up to 10 real-world scenarios that could derail the 2022 recovery and lead to chaos.
Beyond the escalation of geopolitical tensions that do not directly affect the economy until they materialize in some way (sanctions, wars…), some of these risks have begun to rear their heads. A good example is the new wave of covid that part of Europe is suffering and that or the impact of extreme weather events, which can affect the supply chain. As can be seen on the map, the risks are diverse and are distributed around the globe, but all have the capacity to generate chaos in the economy.
The scenarios that can derail the recovery in 2022 -Scenario one: a further deterioration in relations between the US and China forces a total in the world economy
The US and China compete for global influence. The economy despite being very far from belonging to the group of liberal democracies that until now had dominated the economy and the geopolitical tableau. US President Joe Biden tries to convince countries that hold similar values (mostly Western) to put pressure on China together. These pressures include restrictions on trade, technology, finance and investment, along with economic sanctions, forcing some markets (and companies) to choose sides.
Although this scenario is more likely in the field of technology, there is a risk that this strategy could cover industrial or consumer sectors. In an extreme scenario, this could lead to all countries adopting a clear position, since staying out can have serious economic consequences (restrictions from one side or the other).
The world is divided between the economies that support China and those that support the US. A complete global economic bifurcation would force companies to operate in two supply chains with different technological standards. The deployment of 5G telecommunications networks could be postponed in some countries, and sanctions from China would increase uncertainty around global trade and investment.
-Scenario two: a rapid and drastic monetary tightening causes a crash on Wall Street
, rising energy prices, extremely loose monetary policy (for a long time), and the recovery of the real economy have been leading to a strong rebound in inflation in 2021. Although many of these factors are likely to fade as the US economy finds a new footing in the aftermath of the pandemic. and begins to gradually tighten monetary policy by reducing its asset purchases.
However, this slow monetary adjustment announced in its roadmap in the medium term, which is beginning to generate some nervousness within a Fed that is beginning to believe that an increase in interest rates may be necessary in mid-2022 For US stocks, accelerating interest rate increases are enough to trigger a sharp stock market adjustment. Given the high number of retail investors that has been reached recently, the fall in stock prices is weighing heavily on consumer spending, possibly stalling the US economic recovery and pushing the country closer to a new recession.
-Scenario Three: A real estate crisis in China leads to a sharp economic slowdown
The Chinese real estate giant, It seems a matter of time before this firm enters into default and is forced to sell assets (inventories). Given the strong presence of this company in the Chinese economy, its possible default represents a serious risk of financial contagion. The state tightly controls China’s financial markets. Furthermore, Beijing has the tools to isolate these problems concentrated in a few companies and a few sectors, thus reducing the chances of a full-scale financial crisis.
An unfinished city under construction in China
However, many of If confidence deteriorates in the real estate sector, a series of defaults/defaults can occur that would be much more difficult to contain. At the very least, this would lead to a collapse in house prices, with investment contracting, the government would have to bail out the most exposed banks and households, and in many cases, household wealth would be affected significantly. significant (housing is the main asset of Chinese families).
This combination could weigh on China’s real GDP growth (a Spanish-style crash would reduce GDP growth to 1% by the end of 2022). Weak growth, in turn, would instigate a global economic downturn, with commodity exporters particularly hard hit by a period of much weaker demand from China.
-Scenario Four: Tighter global and domestic financial conditions derail recovery in emerging markets
For now, inflationary pressures caused by the recovery in commodity prices have already led some emerging markets, including Brazil, Mexico, Russia, Sri Lanka and Ukraine, to raise interest rates in 2021. Against a backdrop of As countries have borrowed to combat the impact of the pandemic, normalizing interest rates will translate into higher debt service costs for governments. This, in turn, could increase the pressure for aggressive procyclical consolidation (taking advantage of growth to reduce deficits and debt) which would ultimately slow down the recovery in emerging countries.
In particular, the potential for US bond yields to rise faster than expected in the coming months could create risk premia, threatening to trigger capital outflows from the most vulnerable countries. This is not something new, whenever yields rise in the US there is a ‘flight’ of capital from emerging countries to the US (which begins to present a more attractive return/risk equation). The risks will be especially high in countries where foreign currency borrowing is particularly high, for example in Argentina and Turkey, where bond liquidations could trigger currency and/or debt crises.
-Scenario five: new variants of covid-19 emerge that prove to be resistant to vaccines
Vaccination has proven to be key to containing the pandemic. Right now you can see how the countries with the lowest vaccination rates (with full schedule) are suffering the most intense outbreaks, which are forcing some governments to recover some of the restrictions that already seemed to have remained in the trunk of memories.
For this reason, one of the main risks for global recovery is that the new, more aggressive variants of covid-19 prove resistant to current vaccines. Some, particularly the Delta and Mu variants, seem to escape some of the protection offered by some vaccines. Furthermore, the vaccines do not appear to block transmission of the Delta variant, increasing the risk of asymptomatic people transmitting the virus.
The continued spread of covid-19 in some parts of the world could ‘give wings’ to this risk. Therefore, manufacturers could end up entering a perpetual cycle where they have to update their vaccines, creating a scenario where one variant turns out to be highly resistant. Several viruses already exist for which an effective vaccine has yet to be developed despite extensive research, warn EIU economists.
-Scenario Six: Widespread social unrest weighs on global recovery
The impact of the pandemic on income and quality of life has been notable, especially since the greatest savings have been concentrated in the highest income deciles, while the impact on the labor market has been concentrated in jobs that already exist. they were more precarious. All this threatens to increase inequality and generate a social fracture. Even traditionally stable Western states and authoritarian regimes could be in danger.
Countries where political tensions are already high appear to be especially at risk, but so are those whose economies have been hit hardest by the pandemic. Regions like the Middle East, Africa and Latin America are particularly at risk. All three regions were already experiencing intense social tensions in the face of lockdowns and deep recessions. The unrest could lead to a collapse of the government, terrify investors and trigger destabilizing capital outflows. In the medium term, this trend could lead to some risk aversion among investors and higher political risk premia, holding back the global recovery.
-Scenario Seven: Conflict breaks out between China and Taiwan, forcing the US to intervene
The increasing pressure from China on Taiwan since late 2020 has increased the risk of . From the EIU they hope that China will refrain from deliberately starting a direct conflict with Taiwan, given the risk that this movement will ‘wake up’ the US. Furthermore, Taiwan’s President Tsai Ing-wen has rejected declaring independence as an explicit political goal.
However, the growing tension in US-Taiwan relations has led China to make regular raids on Taiwan’s Air Defense Identification Zone (ADIZ). These maneuvers have increased the risk of a military miscalculation, such as an accidental collision between Chinese and Taiwanese fighter jets. A conflict would wipe out Taiwan’s economy, including its semiconductor industry, on which global supply chains depend. There would also be a risk that the US, Australia and Japan would enter the conflict, which could create a perfect breeding ground for unleashing a global war with catastrophic economic consequences.
-Scenario Eight: EU-China ties worsen significantly
The European Union imposed sanctions against China for violating the human rights of Uyghurs in the Xinjiang region. This is one…
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