10 Worst-Case Scenarios for the Global Economy in 2022

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10 Worst-Case Scenarios for the Global Economy in 2022

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Portfolio > Economy & Markets > Economic Trends

10 Worst-Case Scenarios for the Global Economy in 2022

By Michael S. Fischer

Slideshow November 01, 2021 at 05:12 PM Share & Print

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The Economist Intelligence Unit expects the post-pandemic recovery to continue in 2022, with global GDP expanding by 4.1%.

This rebound, however, will mask great variations in the pace of recovery across different regions.

The EIU tracks a host of scenarios that could derail the post-pandemic recovery, affecting global business operations. In its latest report, analysts explore 10 key risk scenarios that need watching in 2022.

See the gallery for these 10 scenarios.

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10 Worst-Case Scenarios for the Global Economy in 2022

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1. Worsening U.S.-China ties force a full decoupling in the global economy.
As the U.S. and China compete for global influence, President Joe Biden is urging mainly Western, “like-minded” countries to collaboratively put pressure on China through trade, technology, finance and investment restrictions as well as through sanctions, forcing some markets and companies to take sides.

In an extreme scenario, developing countries could find a neutral stance economically prohibitive, resulting in U.S.-supporting and China-supporting economies.

The EIU says full global economic bifurcation would force companies to operate two supply chains with different technological standards. Some countries could postpone implementation of 5G telecommunications networks. Sanctions by China would aggravate uncertainty surrounding global trade and investment.

(Image: Shutterstock)

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2. Unexpectedly fast monetary tightening leads to a U.S. stock market crash.
Supply chain disruptions, higher energy prices, ultra-loose monetary policy and a recovering real economy have all contributed to a sharp uptick in U.S. inflation this year. Many of these factors are likely to ease as the economy rebalances after the pandemic; still, they give the Federal Reserve cause to tighten monetary policy gradually by tapering its asset purchases. But if this strategy doesn’t rein in inflation in the medium term, a rise in interest rates by mid-2022 may be necessary.

The EIU says that with U.S. stock price-earnings ratios currently higher than before both the 1929 and the 2007-08 crashes, accelerated interest-rate increases could initiate a sharp stock market adjustment. The high number of retail investors means that falling stock prices would affect consumer spending, possibly halting the U.S. economic recovery and risking a recession.

(Image: Adobe Stock)

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3. A property crash in China leads to a sharp economic slowdown.
The potential default of the debt-stricken Chinese property giant Evergrande represents a serious risk of financial contagion, given exposure to the company across much of China’s economy. The state’s willingness to step in and bail out firms means that it has the tools to isolate financial distress, making a large-scale financial crisis unlikely. But many other Chinese real estate firms are similarly overleveraged. If worsening real estate sentiment leads to more defaults across the country’s real estate sector, it will become much harder to contain.

In that event, the EIU envisages, at the very least, a collapse of property prices, which could depress China's real GDP growth and precipitate a global economic downturn, with commodity exporters particularly affected by a period of much weaker demand from China.

(Image: Adobe Stock)

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4. Tighter domestic and global financial conditions derail the recovery in emerging markets.
Inflationary pressures stemming from rebounding commodity prices have already led some emerging markets to raise monetary policy rates in 2021. In a context where sovereigns have grown increasingly leveraged as a result of the pandemic, interest-rate normalization will feed into higher debt-service costs for governments.

According to the EIU, this could increase pressure for aggressive pro-cyclical fiscal consolidation that ultimately sets back the recovery of emerging countries. In particular, the potential for U.S. bond yields to rise faster than expected in the coming months could force higher emerging-market risk premiums, leaving them vulnerable to sudden drops in capital inflows. Risks will be especially worrisome in countries where indebtedness in foreign currency is particularly high, such as Argentina and Turkey, where bond sell-offs could trigger currency or debt crises.

(Image: Shutterstock)

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5. New COVID-19 variants emerge that prove resistant to vaccines.
The pace of vaccine rollout is the main variable behind economic forecasts. A major risk to global recovery is that new, more aggressive COVID-19 variants prove resistant to current vaccines — some appear to partly escape the protection offered by some vaccines.

The continued spread of COVID-19 in some parts of the world further heightens this risk. As a result, the EIU says, manufacturers could find themselves in a perpetual cycle of having to update their vaccines, creating a scenario whereby a variant proves highly resistant to vaccines.

(Image: Shutterstock)

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6. Widespread social unrest weighs on the global recovery.
The pandemic has disrupted incomes and quality of life, increasing the possibility of unrest, 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, such as countries in the Middle East, Africa and Latin America.

The EIU notes that all three areas were already experiencing heightened social tensions, but many countries within them also endured onerous lockdowns and deep recessions. Accelerating unrest could lead to a government collapse, panicking investors and leading to destabilizing capital outflows. In the medium term, this trend could drive investor risk aversion and higher political risk premiums, stunting the global recovery.

(Image: Shutterstock)

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7. Conflict erupts between China and Taiwan, forcing the U.S. to intervene.
Increasing Chinese aggression against Taiwan since late 2020 has raised the risk of a military conflict in the Taiwan Strait. The EIU says China will likely refrain from purposefully initiating direct conflict with Taiwan because of its concerns about potential U.S. involvement. Moreover, Taiwan’s president, Tsai Ing-wen, has rejected a declaration of independence as an explicit policy goal. Nevertheless, China has reacted to the recent warming in U.S.-Taiwan relations with regular incursions into Taiwan’s air defense identification zone.

The EIU says these maneuvers have raised the risk of military miscalculation. A conflict would wipe out Taiwan’s economy — including its semiconductor industry, on which global supply chains rely. It would also risk drawing in the participation of the U.S., Australia and Japan, which could ignite a global conflict, with catastrophic economic consequences.

(Image: Shutterstock)

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8. EU-China ties worsen significantly.
The European Union’s March imposition of sanctions against China over human rights abuses in Xinjiang and China’s retaliatory sanctions against 10 EU individuals and four organizations have led to a deterioration in EU-China relations. These developments may heighten European calls for EU-U.S. cooperation over China, particularly as President Biden is seeking backing from allies.

The EIU’s baseline forecast is that the EU will continue to pursue an independent approach to dealing with China, but it says the EU could decide to apply sanctions against Xinjiang-based companies, potentially mirroring U.S. import and investment bans. This could also happen in response to Chinese policies in Hong Kong and Tibet, and potentially Taiwan.

Such a scenario would cause operational disruption for the affected Chinese companies and leave EU companies operating in China vulnerable to retaliation.

(Image: Shutterstock)

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9. Severe droughts prompt a famine.
Climate change models point to the risks associated with increased frequency of droughts. Although these have been sporadic events in different parts of the world, they could start to happen more synchronously and for prolonged periods. Intense heat waves scorched Canada and the U.S. this year; and Greece, Turkey and Spain suffered devastating fires; and volatile weather has already contributed to rising prices for some foodstuffs.

The EIU points out that extreme climate events are only one of many risks. Water shortages in southern Europe, the Mediterranean, the southwestern U.S. and southern Africa — the breadbaskets of the world — would have short- and long-term consequences for the global economy. Crop failures would drive up global commodity prices, fueling global inflation.

(Image: Adobe Stock)

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10. An international cyberwar cripples state infrastructure.
As countries vie for the upper hand in the wake of the pandemic, geopolitical competition will continue to heat up The EIU says any military escalation will most likely take the form of cyberwarfare, given the much higher costs of direct military conflict and the difficulty in identifying perpetrators of cyberattacks. This could be triggered by a complete diplomatic breakdown between major powers, leading to an escalating string of tit-for-tat cyberattacks ultimately targeting software that controls state infrastructure.

The EIU says that in the current environment, with economies still feeling the negative effects of the coronavirus-induced global downturn, an event such as the shutdown of a national grid would severely disrupt business operations, creating uncertainty that would weigh on investor sentiment.

(Image: Shutterstock)

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