A Year of Living Dangerously

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2021 was supposed to be a year of economic recovery. According to conventional wisdom, normalcy would return thanks to widespread distribution of Covid-19 vaccines.  But despite the efforts of many developed countries to drive vaccination rates to 70% or more, the virus continues to spread unabatedinto 2022. Global supply chain disruptions resulting from the trade war with China and  an American labor shortage have resulted in shortages in everything from food to cars. Likewise, inflation has followed in lockstep with the shortages while the number of businesses that have filed for bankruptcy has skyrocketed from the lockdowns. While some economists remain hopeful that 2022 will now be the year when the global economy turns the corner, the signs that things could get much worse from here actually seem to be mounting.

China was famously the first economy to send its citizens back to work after the initial lockdowns of 2020, and also managed to register an impressive rebound of its GDP in 2021. However, China does not exist in a vacuum, and with the rest of the world struggling to regain its footing, continued problems in global trade could endanger its GDP growth in 2022. But a more important factor that could derail world GDP growth is the rising tensions between the U.S. and China.  Although the Biden administration’s rhetoric against China has not been as extreme as Trump’s, the torrent of economic sanctions and investment blockades the U.S. has issued against China has not ceased and may even increase in number going forward. Such an onslaught of economic mudslinging can only further strainglobal supply chains, which will increase inflation and slow global growth even more as companies struggle to find alternatives.

However, economic warfare is not the sole source of global economic pessimism for 2022. While unlikely at this point, potential military warfare poses a lingering threat. With standoffs between the U.S. and Iran, Russia, and China, the outbreak of war in any of these three theaters would create a sudden and severe economic shock.  If a war breaks out with Iran, an oil supply shock with China would reverberate throughout all of China’s industries, thereby impacting the world’s fortune 500 companies who have operations in China. If a war breaks out with Russia, disruption of gas supplies to Europe from Russia can similarly grind economic productivity to a halt with much of Europe’s economy being dependent on Russia’s natural gas. And if a war with China breaks out, the whole world may grind to a halt given China’s position as the world’s largest trader and producer of many necessary parts in global supply chains.

Even if the worst-case scenario does not come to pass and military confrontation is avoided in 2022, the world must remain vigilant against economic disruptions. As Omicron has demonstrated, national governments from democratic countries have enforced vaccine mandates without the full consent of its populations. These mandates may hurt the economy. Vaccine mandates have engendered deep distrust of democratic governments as protests and lawsuits proliferate across continents while the number of Covid cases continue to hit new record highs.  The storming of the U.S. Capitol on January 6, 2021 may have been squashed, but the latent hatred amongst anti-establishment citizens in the U.S. and in other democratic countries may still be gaining momentum. Should the Supreme Court allow vaccine mandates to be enforced, civil disobedience may continue, which has the potential for greater numbers of people to quit their jobs and oppose the government. If citizens feel desperate enough, they will not hesitate to fight back as we have seen in every preceding revolution in history. They could take the governments by surprise, much like the throngs of retail traders who used the Robinhood app to wipe out the fortunes of billion-dollar hedge funds.  The economic damage rebels and protesters are capable of inflicting remains anyone’s guess, but their threat is now recognized by government officials as serious as any posed by foreign adversaries. 

Forecasting the economic future has and will remain a highly speculative endeavor. But a world that is still reeling from Covid-19 (and all the attendant policies associated with it) along with U.S. designs to further contain China (and all the ramifications that come with that) will in all likelihood lead to another traumatic year ahead for the global economy.  Even if only one major power suffers a setback, the cascading effect cannot be underestimated since global supply chains are not fully decoupled. No one ever wants to be the bearer of bad news, but unfortunately none of these known flashpoints show signs of approaching a peaceful resolution.