Global Risk Report 2016–Global Economic Slowdown


1.  INTRODUCTION

In my previous posts on the World Economic Forum’s Global Risk Report 2016, I have concentrated on

  • the methodology of the report (corresponding to the Plan Risk Management process of Project Management),
  • the identification of risks (corresponding to the Identify Risks process of Project Management)
  • the qualitative analysis of risks (corresponding to the Perform Qualitative Risk Analysis process of Project Management)
  • the identification of regional risk trends
  • the risks that have gone changed the most since the last Global Risk Report
  • The Paris Agreement as a risk response to the failure of climate-change mitigation and adaptation
  • The risk responses to  Large-Scale Involuntary Immigration

The Global Risk Report focused in detail about the greatest risks the world now faces in the category of environmental risks (failure of climate-change mitigation and adaptation) and geopolitical/societal risks (large-scale involuntary immigration).   In this post, I will discuss the next category of risks that are of highest concern to those respondents of the Global Risk Perception Survey:   economic risks.

The economic risks which are of highest concern are:

  • Fiscal crises in key economies
  • Deflation of asset bubbles
  • Structural unemployment and underemployment
  • Global systematic financial crisis (similar to the one that occurred in 2008)

What is the central theme of these concerns?    The build-up of corporate and public debt in emerging countries, where corporate debt has risen by 26 percentage points in the last decade.

The Economist Intelligence Unit says that they rate the economic slowdown in China has a high likelihood (4 out of a 5-point scale) and a very high potential impact (5 out of a 5-point scale), for a total risk rating of 20 out of 25, the highest of any of the 10 risks they are following as of April 2016.

Capital is flowing out of the country, which has highlighted structural weaknesses in the country and has resulted in a depreciation in the Chinese renminbi currency’s exchange rate against the US dollar.   If the slowdown turns into a hard landing with a recession, this will have the following global effects:

  • depressing of global commodity prices, leading to …
  • huge detrimental impact on Latin American, Middle Eastern and Sub-Saharan African states that had benefited from the previous Chinese-driven boom in commodity prices
  • severe effects on the Eu and US because of growing dependence of Western manufacturers and retailers on demand in China.

The crisis in emerging economies could spark volatility in global markets, which could lead to a global systematic financial crisis that would not be a repeat of what happened in 2008, but worse because the largest banks now have more concentration of financial capital, not less than, they did in the last crisis.

It is not just the impact of the crisis itself, but WHEN it occurs, which is important to watch.    One of the other risks that the Economist Intelligence Unit foresees is the impact of a financial crisis if it occurs before the November 2016 US Presidential Elections.   Under conditions, they predict that Hillary Clinton would beat Donald Trump in the presidential election, but under severe stress such as a terrorist attack or a financial crisis, the election of Donald Trump as president could become a reality.

 

 

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