Politics, Geo- Or Local
Any escalation between mainland China and Taiwan, from blockade to outright invasion, could draw in other world powers—including the U.S.

A superpower war is the worst case, but scenarios short of that include sanctions that would freeze ties between the world’s two biggest economies, and a collapse in Taiwan’s production of the semiconductors that are crucial to global output of everything from smartphones to cars.

Elsewhere, Brazil is scheduled to hold elections in October—against a backdrop of pandemic turbulence and a still-depressed economy. A lot could go wrong, though a win for a candidate promising tighter control of the public purse could bring some relief to the real.

In Turkey, the opposition is pushing to bring forward 2023 elections into next year amid a currency slump widely blamed on President Recep Tayyip Erdogan’s unorthodox economic policies.

What Could Go Right In 2022?
Not every risk is to the downside. U.S. budget policy, for example, could remain more expansionary than appears likely right now—keeping the economy away from the brink of the fiscal cliff, and boosting growth.

Globally, households are sitting on trillions of dollars of excess savings, thanks to pandemic stimulus and enforced frugality during lockdown. If that gets spent faster than expected, growth would accelerate.

In China, investments in green energy and affordable housing, already slated in the country’s 14th Five Year Plan, could amp up investment. Asia’s new trade deal, the Regional Comprehensive Economic Partnership—which encompasses 2.3 billion people and 30% of global GDP—could boost exports.

In 2020, pandemic economies were worse than pretty much any economist had forecast. But that wasn’t true in 2021: in many countries, recoveries were surprisingly rapid. That’s a useful reminder that some things could go right next year, too.

Methodology
SHOK <GO> provides Bloomberg clients with a set of models of the U.S., euro area and U.K. economies which capture the interplay between demand, inflation, the exchange rate and interest rates when shocks hit. The equations in the model are reduced-form and New Keynesian in spirit. The key relationships include an IS-relation, a Phillips curve, a Taylor rule, an uncovered interest rate parity and a set of autoregressive equations to determine exogenous shocks.

With assistance from Anna Wong, Jamie Rush, Ziad Daoud, Adriana Dupita, Scott Johnson, Bhargavi Sakthivel, Chang Shu, Jacqueline Gu and Adrian Leung.

This article was provided by Bloomberg News.

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