The research and analysis division of The Economist Group has produced a new report entitled ‘Cause for concern: The top 10 risks to the global economy’. Among the risks are the prolonged fall in major stockmarkets, Trump’s protectionist policies, China’s disorderly and prolonged economic downturn as well as falling oil prices
“[…] the global economy is facing the highest level of risk in years,” says the new report of The Economist Intelligence Unit (EIU). Entitled ‘Cause for concern: The top 10 risks to the global economy’, the report suggests that headlines are dominated by protectionist rhetoric, major territorial disputes, terrorism, surging cyber-crime and even the threat of nuclear war. The global economy has seen periods of high risk before, with threats emanating from the regional and the national level, as well as from state and non-state actors. “What is unique about this period of heightened risk, however, is that unlike other periods in recent decades, risks are also originating from the global level, as the US questions its role in the world and partially abdicates from its responsibilities”, can we read in this report which identifies and assesses the top ten risks to the global political and economic order.
Prolonged fall in major stockmarkets destabilizes the global economy
Global stockmarkets entered a period of pronounced volatility in early February after a long bull market, raising some concern that it could be the start of a more pronounced downturn.
The proximate cause of this recent volatility was a US jobs data release, which showed an acceleration in nominal year-on-year wage growth. This increase gave rise to concerns that wage growth could accelerate quickly in the coming months, forcing the Federal Reserve (Fed, the US central bank) to tighten monetary policy more quickly than expected. Markets have proved to be highly sensitive to speculation over monetary policy owing to uncertainty over how much of the previous bullishness was due to quantitative easing (QE) across much of the developed world, which depressed interest rates, thus making shares more attractive. There is a risk that share prices will crash in the US, which would lead to contagion around the world.
Conclusion: The global economy is moving into a new phase, where more and more central banks will begin to wind down or reverse their loose monetary policy positions in response to vigorous growth rates, giving rise to significant uncertainty.
Global trade slumps as US steps up protectionist policies
We currently expect further strong global trade growth in 2018-19, buoyed by strong emerging-market export growth and robust Chinese economic growth. However, there is a risk that the administration of the US president, Donald Trump, translates its protectionist rhetoric into more concrete action that severely damages global trade channels.
The two central scenarios that we are primarily concerned about is a US withdrawal from the North American Free-Trade Agreement (NAFTA) and restrictive measures taken by the US against China that instigate a trade war. US withdrawal from NAFTA (or even just a rise in uncertainty over its membership participation) would create enormous ructions in one of the largest free-trade areas in the world. An end to such a major trade deal would be likely to fuel protectionist sentiment elsewhere in the world, making it harder for regions and countries like the EU and Japan to push a more liberal trade agenda.
Conclusion: Any ramp-up in protectionism would certainly have repercussions beyond North America and China. Prices and availability for US and Chinese products in the supply chains of companies from other nations would be badly affected. Consequently, global growth would be notably curtailed as investment and consumer spending fall back.
Territorial disputes in the South China Sea lead to an outbreak of hostilities
The national congress of the Chinese Communist Party in October 2017 marked a watershed in terms of China’s overt declaration of its pursuit of great-power status, with the congress setting the goal of China becoming a “leading global power” and having a “first-class” military force by 2050.
Concerns about how China intends to deploy its expanding hard-power capabilities in support of its territorial and maritime claims are likely to encourage other countries to hedge against China, despite its economic heft. Amid increasingly aggressive moves by China to place military hardware on disputed islets, the other claimant countries in the region have sought to beef up their own maritime defence capabilities.
Conclusion: Were military clashes to occur, the economic consequences would be significant. Economic growth would suffer, and regional supply networks and major sea lanes could be disrupted.
Global growth surges above 4%
Strengthening growth in some large markets means that there could be a notable bump-up of overall global growth.
In 2017 economic data reflected strong fundamentals in many parts of the world, including Europe and a number of emerging markets, setting the stage for a robust 2018. This is likely to push global growth close to 3%, but not to 4%, as capacity constraints in the US and China, commodity price increases and monetary policy normalisation weigh on economic performance. Overall, there is a prospect of stronger global growth driven by emerging markets (and Europe, to a lesser, but still important, extent). Growth surpassing 4% would be the highest level since 2010, when the global economy was awash with post-crisis stimulus.
Conclusion: A broad-based acceleration in growth would not only provide welcome relief to slow-growing countries elsewhere but could also assist in any longer-term economic rebalancing in China, making the whole process less painful. An improvement in global demand would provide further support for commodity prices, adding to an economically virtuous circle for commodity exporters in Latin America, the Middle East and Sub-Saharan Africa.
A major cyber-attack cripples corporate and government activities
There is a risk that the frequency and severity of cyber-attacks increases to an extent that corporate and government networks could be brought down or manipulated for an extended period of time.
There was a spate of high-profile cyber-attacks during 2017, including the so-called WannaCry and Petya attacks, that affected numerous global networks, although the damage was relatively well contained. Many of the recent attacks have centred on the use of ransomware, which seeks to make financial gain by exploiting network vulnerabilities. These attacks could well be part of wider efforts by state actors to cripple rival governments and economies—blame is frequently directed at North Korea, for example—and include efforts to either damage physical infrastructure by cyber-attacks or gain access to sensitive information.
Conclusion: Were government activities to be severely constrained by an attack, or physical infrastructure damaged, the impact on economic growth would be even more severe. On the positive side, the recent attacks have highlighted that in many cases the impact can be mitigated by fairly basic cyber-security techniques. However, if these attacks represent a test bed, worse could easily follow.
China suffers a disorderly and prolonged economic downturn
China is expected to post another year of robust economic growth in 2018, but questions remain over how long it can delay efforts at deleveraging without trigging issues in the over-stretched financial sector.
China’s three-day Central Economic Work Conference, an annual meeting of policymakers, concluded in late December, setting out economic policy priorities for 2018. Softer language on deleveraging hints that efforts to reduce debt in 2018 will not be as aggressive as previously assumed. Although this may store up trouble for the future, it does lessen the shorter-term threats to the economy from an attempted deleveraging that gets out of hand, meaning that the risk of a major and uncontrolled slump in 2018-19 seems low now.
Conclusion: If the Chinese government is unable to prevent a disorderly downward economic spiral, this would lead to much lower global commodity prices, particularly in metals. This, in turn, would have a detrimental effect on the Latin American, Middle Eastern and Sub-Saharan African economies that had benefited from the earlier Chinese-driven boom in commodity prices. In addition, given the growing dependence of Western manufacturers and retailers on demand in China and other emerging markets, a disorderly slump in Chinese growth would have a severe global impact—far more than would have been the case in earlier decades.
There is a major military confrontation on the Korean Peninsula
Tensions between the US and North Korea have been a geopolitical constant since the end of the Korean War in 1953. However, the situation on the Korean Peninsula currently appears more serious owing to the rogue regime’s progress on developing a long-range missile that can threaten US soil and on mastering nuclear technology.
The combination of a more aggressive stance by the US and the likelihood of North Korea becoming a fully-fledged nuclear state capable of hitting the US mainland by 2018 or early 2019 could result in an escalation to major armed conflict. Indeed, risks will be heightened over the next two years, with some in the US calling for a preventative strike before North Korea has the capability to launch intercontinental nuclear missiles. However, under such a scenario North Korea would almost certainly retaliate with conventional weaponry and potentially shorter-range nuclear missiles, bringing devastation to South Korea and Japan in particular.
Conclusion: The US’s position is the most fluid. A pivot from aggression to containment is likely in the medium term, but before then the risk of a US attack aimed at damaging North Korea’s military capabilities is growing.
Proxy conflicts in the Middle East escalate into direct confrontations that cripple global energy markets
The rivalry between Saudi Arabia and Iran has been a multi-decade issue. However, it is currently intensifying and there is a small but notable risk of outright conflict between the two countries in the coming years as the wider region becomes more polarised between the two sides.
Adding to the aggressive approach taken by Saudi Arabia is a more divisive and unclear US policy in the Middle East. The decision of the previous US president, Barack Obama (2009‑17), to draw back direct US influence in the region and engage in diplomacy with Iran—eventually leading to the 2015 nuclear deal—played a part in Saudi Arabia deciding to take a more active role in opposing Iran. With Mr Trump ramping up his incendiary rhetoric and expanding unilateral sanctions on Iran, the US is now inflaming tensions in the region.
Conclusion: The worst-case scenario, these proxy battles could lead to wider conflict in the Gulf region, potentially pitting Saudi Arabia and Iran directly against each other, shutting down the Strait of Hormuz and crippling global energy markets. In a period when we already expect global oil stockpiles to be falling, any disruption to supply from the Gulf would quickly translate into a surge in prices and would consequently hit global economic growth prospects severely.
Oil prices fall significantly after the OPEC deal to curb production breaks down
OPEC producers and Russia agreed to extend their production cuts throughout 2018 at the end of November 2017. After that, the quota system is expected to be wound down only gradually. However, there is a risk that the OPEC deal will break down.
The oil exporters’ organisation has lost market share to non-OPEC producers, particularly the US, and during 2018 OPEC producers may calculate that their strategy has not worked, choosing to revert to their previous policy of preserving market share, come what may. Alternatively, rising political tensions between members of the Gulf Co-operation Council related to the Saudi-led boycott of Qatar could potentially erode OPEC countries’ willingness to work together to rebalance the oil market.
Conclusion: Having only recently started to recover from the 2014-16 downturn, oil prices would be hit hard by a sudden, large increase in crude production, and some countries would face serious balance-of-payments shocks. Developing nations, including Nigeria and Angola, would face serious debt distress, and possibly also political and social instability.
Multiple countries withdraw from the euro zone
We think it more likely than not that Greece will leave the euro zone in the medium term. We do not expect other countries to follow, but if they did, it would be highly damaging to both the European and the global economy. Greece’s problems are largely country-specific, such as the ingrained corruption of its oligarchy, a lack of foreign investment (resulting from closed sectors, protectionism and hostility to foreign ownership) and a resultant lack of competitiveness. As such, Greece’s withdrawal would not pose a systemic risk to the bloc, especially as the European Central Bank would intervene to limit contagion. Nevertheless, this does not mean that there is no prospect of Greece’s exit leading to other exits from the euro zone.
Conclusion: If more countries were to leave the euro zone, the global economy would be destabilised. Countries leaving the zone under duress would suffer large currency devaluations and be unable to service euro-denominated debts. In turn, banks would suffer huge losses on their sovereign bond portfolios and the global economy could be plunged into recession.