After the Financial Crisis: Recovery, Mediocrity, or Instability?

Trend: The Economist Intelligence Unit predicts a 10% probability of Instability, the worst case scenario for the aftermath of the financial crisis.

In a post earlier this month (Our Next Five Years: Recovery, Mediocrity, or Instability?), we discussed three scenarios for the financial crisis in 2010 - 2015.

London's Economist Interlligence Unit says there's a 90% probability of Recovery/Mediocrity and a 10% probabilty of Instability.

The Economist Interlligence Unit has identified three macroeconomic scenarios for the evolution of the crisis that began in the US sub-prime mortgage market and is now reverberating throughout the world economy.

Scenario 1: Our central forecast (60% probability)

Government stimulus stabilises the global financial system and restores economic growth in leading developed markets during 2010, albeit at lower levels than in recent years. 

Scenario 2: The main risk scenario (30% probability)

Stimulus fails, leading to continued asset price deflation and sustained contraction in the leading economiesóa depression persisting for some years. The stubborn decline in global economic activity is punctuated by occasional rallies that are taken as signs of recovery, but these quickly fade as the
underlying downward trend reasserts itself. The prominent role of governments in propping up banks and reviving domestic demand leads to strong political pressure for protectionism, effectively putting the process of globalisation into reverse. 

Scenario 3: The alternative risk scenario (10% probability)

Failing confidence in the dollar leads to its collapse, and the search for alternative safe-havens proves fruitless. Economic upheaval sharply raises the risk of social unrest and violent protest. A Political Instability Index covering 165 countries, developed for this report, highlights the countries particularly vulnerable to political instability as a result of economic distress. The results of the index are displayed in map form and in a ranking table in the centre pages, along with a brief methodology.