The Greatest Risks to the Global Economy in 2015

While the global economy is forecast to grow by less than 3.5% for the third consecutive year in 2014 (the first time this has happened since the mid-1990s), there is a growing sense of optimism that the global economy is on the verge of a more sustained recovery.  This optimism is being driven by a strong recovery in the United States and Britain, as well as continued respectable rates of economic growth in East Asia.  However, the pace of this economic recovery is likely to remain below potential due to a number of key risks facing the global economy in the coming year.

The single greatest risk to the global economic growth over the near-term is the threat of long-term stagnation and deflation in the Eurozone.  While the Eurozone’s share of the global economy has steadily fallen in recent decades, it nevertheless continues to account for 17% of worldwide economic output.  As such, the fact that economic growth remains anemic in much of the Eurozone, and that current domestic demand levels in the Eurozone remain below 2007 levels, means that a sizeable portion of the global economy is not contributing to growth.  Furthermore, the Eurozone’s woes are being exacerbated by the fact that deflationary pressures are mounting and could result in long-term stagnation such as that experienced by Japan over the past 22 years. 

Another significant risk facing the global economy in the coming months and years is that threat of reducing demand levels in East Asia’s leading economies.  We have already witnessed the impact that lower (but still respectable) levels of demand for natural resources and agricultural products in China have had on mining- and agricultural-based economies around the world.  As growth in China is forecast to continue to trend downwards, any acceleration of this downturn would have a massive impact on many of the world’s leading exporting economies.  Moreover, a Chinese slowdown would impact East Asia’s other large economies, reducing demand levels across the wider region and negatively impacting global economic growth levels.

The other significant threat to the global economy at present is the risk of higher levels of geopolitical tensions that could impact some of the world’s most important economies.  For example, economic sanctions on Russia have already had a major negative impact, not only in Russia, but also in many struggling European economies that are major exporters to Russia.  Two key flashpoints to watch in the coming months and years are in the East and South China Seas, where the world’s two leading engines of economic growth, the United States and China, as well as a host of important Asian economies, are involved in increasingly acrimonious territorial disputes.  Other geopolitical tensions that could disrupt the global economy in the near future include unrest in the Middle East’s main oil producing countries and further clashes involving Russia and its neighbors.  Altogether, the global economic recovery will continue to face a rocky path as it strives to break out of its current malaise.