paper published by The Economist Intelligence Unit (The EIU). "However, this rebound will mask great variations in the pace of recovery across different regions. In addition to this baseline outlook, we are also tracking a host of scenarios that could derail the post-pandemic recovery and have an effect on global business operations." Through this paper, The EIU aims to summarize some of these key risks that could impact global growth and inflation.
Below are The EIU's top ten global risk scenarios for 2022:
- Worsening US-China ties force a full decoupling in the global economy;
- An unexpectedly fast monetary tightening leads to a US stockmarket 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; and
- An inter-state cyberwar cripples state infrastructure in major economies.
The EIU explains that it tracks "these risks and score them in terms of probability (how likely are they to happen?) and impact (if they happen, how great is the impact on businesses?)." Furthermore, the UK-based organization combines "these probability and impact scores to produce an intensity rating to support our clients in their ongoing risk monitoring requirements, helping them to answer the question, 'how worried should we be?'. Below is a snapshot of scores for our ten global risk scenarios."
Worsening US-China ties force a full decoupling in the global economy is a risk scenario that concerns me the most. As The EIU explains:
The US and China are vying for global influence. 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. 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. Implementation of 5G telecommunications networks could be postponed in some countries, and sanctions by China would heighten uncertainty surrounding global trade and investment.
Unexpectedly fast monetary tightening leads to a US stockmarket crash is another risk scenario that I am watching closely. The EIU points out that "Supply-chain disruptions, higher energy prices, ultra-loose monetary policy and a recovering real economy have all contributed to a sharp uptick in US inflation in 2021." The paper adds that "Although many of these factors are likely to ease as the US economy rebalances post-pandemic—indicating that spiking inflation will not be long-lasting—they nonetheless give cause for the Federal Reserve (Fed, the central bank) to start tightening monetary policy gradually by tapering its asset purchases. However, if slow and clearly signaled monetary tightening fails to rein in inflation in the medium term, a rise in interest rates by mid-2022 may be necessary." Moreover, "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 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."
And those who live or hold business interests in emerging markets should be mindful that tighter domestic and global financial conditions could derail the recovery in these markets. The EIU says "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." What is more, "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. 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." The paper crucially notes that "[r]isks will be especially elevated in countries where indebtedness in foreign currency is particularly high, for example in Argentina and Turkey, where bond sell-offs could trigger currency and/or debt crises."
Which risk scenarios concern you the most? What strategies are you employing to make your company resilient should any of these risks materialize?
Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.