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Report warns of major risks to world economy

Arthur Sullivan
March 2, 2018

Going by growth forecasts, this is a pretty good time for the world economy. Yet a new report warns of big risks, some of which are already coming to bear through US trade policy and stock market jitters.

China Trump auf erster Asien-Reise
Image: picture-alliance/AP Photo/A. Harnik

If positive global economic growth forecasts are what really get you going, then what a time this is to be alive.

The most recent global growth forecasts from the heavy hitters — the IMF, the World Bank, the World Economic Forum and so on — talk of "buoyancy" and "sustained upswings", of "cyclical pickup" and "rising sentiment".

Global growth rates of between 3 and 4 percent, rising all the time in 2018 and 2019 — what's not to love?

Plenty, according to the Economist Intelligence Unit (EIU), a global business intelligence research and analysis group that regularly assesses major risks to global economic health.

The unit has published what it determines to be the top 10 risks to the global economy over the next two years. For those high on optimism, it makes for sobering reading.

Using a metric combining the probability of a given event with the severity of its impact, the report says the two gravest threats to world economic health over the next two years come from the USA.

The growing global economy

One is a possible prolonged collapse in global stock markets, regarded as having the same level of risk as a global trade war precipitated by US protectionist policies — something which looks increasing likely after US President Donald Trump announced stringent new tariffs on steel and aluminum imports.

Watching for the tide to go out

"They are both risks that we think have a decent chance of happening, maybe a 20 or 30 percent chance," Philip Walker, the editor of the report, told Deutsche Welle. "They would have a severely detrimental impact on the global economy and would lower global GDP significantly."

At the start of February, global stock markets plunged on the back of stronger-than-expected US jobs figures, which had led to fears over inflation.

"The US stock markets are incredibly sensitive to any data that points towards a quicker rate of monetary tightening than they are currently factoring in," explained Walker.

He says that a period of "great uncertainty" is ahead for the next few months, particularly because of the growing expectation that the US Federal Reserve will normalize its monetary policy and increase interest rates, with other major treasuries around the world, such as the ECB, likely to follow.

Many of the positive global growth forecasts stem from these expectations, but the EIU's risk practice director says there is "a certain frothiness" to much of this, particularly when it comes to company valuations.

USA Wall Street - Finanzmärkte in Panik (picture alliance/dpa/XinHua)EP
Report editor Philip Walker says a period of "great uncertainty" is ahead for stock marketsImage: picture alliance/dpa/XinHua

"How many companies have been able to keep going because they have been able to access funds so cheaply?" he asks. "How many, when the tide retreats a little bit, are going to be left highly exposed?

Meddling with the forces of nature

The probability of a global trade war, rated at around 30 percent by the EIU, has surely increased in the last 24 hours. The announcement that the USA will charge tariffs of 25 percent on steel imports and 10 percent on aluminum has sparked outrage from several key US trade partners.

Trump's response, via a tweet, that "trade wars are good, and easy to win" is unlikely to sow union.

The report outlines two distinct, short-term risks with regard to global trade. One is the kind outlined above, that the Trump rhetoric of 2016 and 2017 — largely aimed at China — will turn into action in 2018, as it seems it already has.

The second is the possibility that the USA will pull out of the North America Free Trade Agreement (NAFTA), something which would have a deep global impact, according to Philip Walker.

US tariffs could spark trade war

"We are in a situation where global supply chains are so much interlinked, this (NAFTA threat) isn't just a North American issue, or an America-China issue — it is global," he says.

What is clear, according to this report, is that the primary risk around global trade relates to how China will react to US protectionist policies. So far, the reaction from the world's second largest economy to the US policy shifts of 2018 has been relatively measured.

On January's decision to slap tariffs on washing machines and solar panels, Beijing's Commerce Ministry's said it would collaborate with the WTO to defend its interests. On steel and aluminum — which China does not import in big volume to the US — the reaction was notably chilled.

"Nothing can be done about Trump. We are already numb to him," said Li Xinchuang of the China Iron and Steel Association.

"If China were to react disproportionately" warns Walker, "or if the US were to react incredibly disproportionately, that is how you could see that very quickly magnifying into a wider trade issue."

Nuclear threats, cyberattacks, proxy wars

Plenty of other threats to global economic stability abound, some more likely, and indeed more chilling, than others.

Many of the other risks relate to overt war. The third highest relates to the possibility of hostilities breaking out in the South China Sea over territorial disputes, with China claiming territorial waters as far south as the Malaysian coast.

Bildergalerie Jahresrückblick 2017 International
Tensions are high on the Korean PeninsulaImage: Reuters/KCNA

Then there's the possibility of something dramatic happening on the Korean Peninsula, where the North Korean nuclear program continues to stoke major tensions. The EIU sees this as a low probability event, with South China Sea hostilities seen as significantly more likely.

Then there are fears over the possibility of outright war between Middle Eastern rivals Saudi Arabia and Iran, whose long-running geopolitical dispute has prompted several proxy wars in the region and an increasing polarization over where different countries' loyalties lie.

Other risks identified by the EIU are:

  • A major cyberattack crippling corporate or government activities
  • China suffering a prolonged economic downturn
  • Oil prices falling if the current OPEC deal breaks down
  • Multiple countries withdrawing from the eurozone

Risky business

It's not all doom and gloom. There is one "positive" risk, namely the chance of global growth surging above 4 percent. But the overall picture points to danger lurking around most corners.

The EIU assess the top ten global risks once a month, but it has decided to publish the latest findings as it believes the global economy is facing its highest level of risk in several years.

Read more: In Davos, the world's elite are optimistic

"What we see over the last few months is this disconnect between the global economic story and the global geopolitical and financial risk story," explains Walker.

Cyberattacks, drought, natural disasters among biggest global risks

Unemployment may be low, inflation may be seemingly under control and economic forecasts are positive but behind all that, there is a sense in this report that major tectonic plates, especially in the US-China relationship, are shifting.

"Around these changing relationships, we are seeing so many potentially devastating risks crop up but yet we have this bright economic picture. It's that disconnect that we wanted to try and give voice to in this report," says Walker.

"There are major risks at play. We are not saying any of them are certainly going to happen but for the companies, governments and organizations that use us, we want to help them prepare for a world in which something catastrophic does happen."