A range of scenarios could derail the global economy as it recovers from COVID-19, a new report shows.
In a Risk Outlook 2022 report released by Economist Intelligence Unit (EIU), a research and analysis division of Economist Group, it expects post-COVID-19 recovery to continue in 2022. Global gross domestic product (GDP) will expand by 4.1 percent, its forecast shows.
But the post-pandemic rebound will mask "great variations in the pace of recovery" across different regions, EIU says in the report. It's tracking a range of scenarios that it anticipates would affect global business operations and derail recovery.
From worsening US-China ties, to a China property market crash, and even cyber-warfare as countries battle for the upper hand in the wake of COVID-19, following are the top ten global risk scenarios that EIU says could affect global growth and inflation.
The top ten global risks scenarios for 2022
- Worsening US-China ties force a full decoupling in the global economy.
- Unexpectedly fast monetary tightening leads to a US stock market crash.
- A property crash in China leads to a sharp economic slowdown.
- Tighter domestic and global financial conditions derail the recovery in emerging markets.
- New COVID-19 variants emerge that prove resistant to vaccines.
- Widespread social unrest weighs on the global recovery.
- Conflict erupts between China and Taiwan, forcing the US to intervene.
- EU-China ties worsen significantly.
- Severe droughts prompt a famine.
- An inter-state cyberwar cripples state infrastructure in major economies.
Source: EIU Risk Outlook 2022 report.
Having scored the ten possible scenarios in terms of how likely they are to happen and their impact on business, EIU said worsening US-China ties ranked highest, followed by a US stock market crash and a property crash in China.
An interstate cyber war affecting major economy infrastructure ranked lowest.
Worsening US-China ties have led to sanctions and restrictions in trade, technology, finance and investment, forcing some markets and companies to choose sides.
There's a risk this will also affect industrial or customer 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," EIU said in the report.
Companies could be forced to operate two supply chains with different technological standards. It could mean implementation of 5G networks is postponed in some countries. Sanctions from China would "heighten uncertainty" surrounding global trade and investment, EIU said.
Discussing a possible share market crash, EIU said many factors driving up inflation in the US are expected to ease - but they give the Federal Reserve reason to start tightening monetary policy. If it doesn't rein inflation in, interest rates could rise by mid-2022.
US stock price/earning ratios are currently higher than before both the 1929 and the 2007-20008 crashes, EIU said. Accelerated interest-rate increases could be enough to initiate a sharp stock market adjustment.
"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," EIU said in the report.
China's property market is at risk of a crash, as Chinese property giant Evergrande has missed an estimated US $300b of debt repayments. As China's financial markets are controlled tightly by the state, its willingness to bail companies out makes a large-scale financial crisis unlikely.
But many other China-based real estate companies are similarly "overleveraged". If worsening sentiment leads to a string of defaults, it will be 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," EIU said in the report.
The effects could see China's real GDP growth plunge below the 6-to-7 percent range of recent years. Weak growth would likely instigate a global economic downturn, affecting commodity exporters.
Referring to southern Europe, the Mediterranean, the south-western US and southern Africa as "breadbaskets of the world", EIU said water shortages would likely affect the global economy in the short and longer term.
"Multiple crop failures would drive up global commodity prices, most likely of highly irrigated crops such as wheat, maize and rice. Such a situation would fuel global inflation and weigh on global growth and sentiment," EIU said.
EIU expects geopolitical competition to continue to heat up as states battle for the upper hand in the wake of the COVID-19 pandemic.
Due to difficulties identifying perpetrators of cyber-attacks, and as the costs of direct military conflict are higher, conflict is more likely to escalate in the form of cyber warfare.
"This could be triggered by a complete diplomatic breakdown between major powers (for example between the US and either China or Russia), leading to an escalating string of tit-for-tat cyber-attacks ultimately targeting software that controls state infrastructure," EIU said.
With economies still feeling the impacts of COVID-19, shutdown of a national grid would disrupt business operations and create uncertainty, affecting attitudes towards investment.