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Two years after COVID-19 first emerged in China, the potential failure of the country’s “zero-COVID” policy poses the biggest global risk of 2022, threatening to add to global supply-chain disruptions and inflationary pressures, warned Eurasia Group, a political-risk consulting firm.
“For rich countries, the end of the pandemic will arrive soon as the virus collides with highly vaccinated populations and treatments that prevent death. But most countries, and particularly China, will have a harder time getting there,” wrote Eurasia Group President Ian Bremmer and Cliff Kupchan, the firm’s chairman, in a Monday report.
They predicted China’s zero-COVID policy, running up against a much more transmissible omicron variant with vaccines that are only marginally effective, will fail to contain infections in 2022. That will lead to larger outbreaks and more severe lockdowns “and greater economic disruptions in a nation that has long been the world’s primary engine for growth.”
The zero-COVID policy has entailed border restrictions and strict lockdowns when cases emerge. The 13 milion residents of Xi’an in northwestern China have been confined to their homes for the past 12 days in the largest lockdown since the 11 million residents of Wuhan, where the virus first emerged, were locked down in 2020, according to CNN.
The policy looked incredibly successful in 2020, but now has become a fight against a much more transmissible variant with broader lockdowns and vaccines with limited effectiveness, Bremmer and Kupchan wrote. “And the population has virtually no antibodies against Omicron. Keeping the country locked down for two years has now made it more risky to open it back up.”
That’s the opposite of where China’s leader, Xi Jinping, wants the country to be in the runup to his third term, but there’s nothing he can do about it, they said, arguing that the initial success of the zero-COVID policy and Xi’s personal attachment to it now makes it impossible to change course.
For the world, that means more supply-chain disruptions. “Shipping constraints, COVID-19 outbreaks, and shortages of staff, raw material, and equipment — all more acute because of China’s zero-Covid policy — will make goods less available,” they wrote. “High prices for shipping will also hurt small- and medium-sized businesses that don’t have the resources to book containers, let alone their own ships. Supply constraints should recede over the course of 2022, but disruptions will persist in many sectors. Midyear contract negotiations at major U.S. ports and related slowdowns will add to the difficulties.”
High inflation, breeding inequality, feeding economic insecurity and public discontent, will be exacerbated and remain an overarching economic and political challenge, they said, noting emerging market central banks are being pressed to raise interest rates to contain inflation while developed market central banks pivot toward tighter policies.
Major stock benchmarks rallied strongly in 2021 and were trading flat to modestly higher in choppy trade on Monday. The Dow Jones Industrial Average
DJIA,
was trading near unchanged, while the S&P 500
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was up 0.1% and the Nasdaq Composite
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advanced 0.7%.
Bremmer and Kupchan offered up nine other top risks for 2022:
- A ‘technopolar’ world: The conflict between governments and giant tech firms over the digital sphere.
- U.S. midterms: This fall’s congressional elections “will take place amid allegations of fraud by both Democrats and Republicans, and they will set up a 2024 presidential election that Donald Trump, if he runs, will either win outright or try to steal,” they wrote. “This year’s vote will not itself provoke a crisis, but it represents a historic tipping point.”
- ‘China at home’: The previously mentioned complications around the zero-covid policy combined with Xi’s reform plans will unsettle markets and companies in 2022, Eurasia Group said.
- Russia: The buildup of Russian troops on the border with Ukraine was already a source of worry. It comes as Russian President Vladimir Putin insists on restrictions on NATO. A “grand bargain” is unlikely and close encounters between NATO and Russian ships and planes will become more frequent and more dangerous, increasing chances of an accident, they warned.
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Iran: As Iran’s nuclear program advances and diplomatic efforts stall, Israel is increasingly likely to take action on its own, raising the specter of strikes on Iranian nuclear facilities, Bremmer and Kupchan wrote That’s a recipe for volatile oil prices
CL00,
+1.02% BRN00,
+1.38%
and jittery regional states, and an increased risk of conflict. - ‘Two steps greener, one step back’: Rising energy costs will force governments to favor policies that lower energy costs but delay climate action.
- ‘Empty lands’: Domestic worries will distract Washington and Beijing, while the European Union, U.K. and Japan will prove unable to fill the vacuum. In Afghanistan, the Taliban “will struggle to stop the local Islamic State affiliate from drawing in militants from other parts of the world to settle in ungoverned expanses of the country,” they said. “The U.S. has sharply limited intent or capacity to intervene, and China has shown little interest. Afghanistan is returning to its pre-9/11 position as a global magnet for international terrorism.”
- ‘Corporates losing the culture wars’: “Consumers and employees, empowered by ‘cancel culture’ and enabled by social media, will put new demands on multinational corporations and the governments that regulate them. Multinationals will have to spend more time and money navigating environmental, cultural, social, and political minefields,” they wrote.
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Turkey: President Recep Tayyip Erdogan will drag Turkey’s economy and international standing to new lows in 2022 in an effort to reverse plunging poll numbers ahead of elections in 2023, said Bremmer and Kupchan. Unemployment is soaring, inflation has topped 30% and the lira
USDTRY,
-2.25%
is volatile. Look for Erdogan’s foreign policy to be more combative in 2022 to distract voters from the country’s economic woes — and in the unlikely event of early elections this year, all those risks will be amplified.
