28 March 2018

Ten Economic Risks to Watch in Q2 2018

The global economy entered 2018 with more optimism than at any time in the past decade, as nearly all of the world’s leading economies were recording relatively healthy rates of growth in recent months.  Furthermore, there were hopes that many of the economies that had been struggling in previous years, such as those in Latin America, Africa and the Middle East, would be able to improve their fortunes for their goods and commodities on the back of rising demand in the world’s leading export markets.  Nevertheless, while growth appears to have remained strong so far this year, a number of major risks are threatening to usher in much lower levels of growth for the global economy in the months ahead.  Here are ten of the threats to the global economy that are keeping us awake at night:

A US-China Trade War: The decision by the Trump Administration to impose tariffs on up to $60 billion in imported goods from China, in response to Chinese misuse of US intellectual property, has set the stage for a potential trade war between the world’s two largest economies.  Should China choose to retaliate in a large way, and should the US respond with more actions against China, the threat to the health of the global economy will be immense, with trade and investment being disrupted to a degree not seen since 2008’s financial crisis.

US-Europe Tensions: Not only is the United States in the midst of a major trade dispute with China, but it has also seen its economic relations with Europe deteriorate in recent years.  As a region that is dependent largely on exports for its growth, Europe is extremely worried about the protectionist policies being enacted in Washington.  At the same time, many US government officials accuse the European Union of unfairly targeting US-based IT firms that operate in Europe, opening the door for what could be a major trans-Atlantic economic showdown.

NAFTA: When the Trump Administration decided to exempt Canada and Mexico from its recent tariffs on steel and aluminum imports into the United States, there were hopes that this signaled that the NAFTA free trade agreement among these three countries could be saved.  However, many government officials in Canada and Mexico remain convinced that President Trump intends to scrap NAFTA in the coming months, and this threat is likely to be a major drag on economic growth in both Canada and Mexico.

Vulnerable Supply Chains: With trade barriers going up all around the world, major manufacturing companies are waking up to find that their global supply chains are extremely vulnerable to any disruptions to trade that could occur.  With major manufacturing centers such as China and Mexico likely to bear the brunt of these trade disruptions, manufacturers with operations or suppliers in those countries are fearful of the impact that a full-blown trade war will have on their global supply chains.

Sabotage: The headlines around the world in recent months have been dominated by Russian efforts to sabotage, or at least weaken, the democratic process in countries all around the world.  However, many countries are using economic sabotage to further advance their own agendas or to weaken perceived adversaries.  As political tensions rise, the use of economic sabotage by many of the world’s leading economies is likely to grow, both in terms of scale and frequency.

Short-Term US Stimulus: Recent actions by economic policymakers in the United States have provided a major short-term stimulus for the world’s largest economy, one that is likely to boost economic growth rates there over the near-term.  However, the impact of these stimulus measures is likely to be realized primarily over the near-term, and there will be a major adjustment period as these stimulus measures wear off later this year and in early 2019.

A Strong Euro: The continuing strength of the euro remains a major threat to the Eurozone economy, as it is eroding the higher level of export competitiveness that allowed Europe’s economic recovery to take hold in recent years, beginning in 2014 when the euro experienced a sharp depreciation.  Moreover, much of the Eurozone is already poised to see growth start to trend downwards later this year, so a stronger euro would likely accelerate this downtown. 

Chinese Debt: Chinese debt levels continue to rise, with some estimates showing that overall Chinese debt is now near to, or even in excess of, 300% of that country’s total GDP.  While much of this debt is in domestic hands, there is still a significant risk posed by this debt.  This is due to the fact that corporate debt continues to rise at an alarming pace in China, and should corporate earnings fall in the coming months, this type of debt could produce a great deal of instability within China’s at-risk banking sector.

Middle East and Africa: Most of the economies of the Middle East and Africa have experienced a very difficult period over the past three to four years, as lower commodity prices have had a devastating impact on these regions’ commodity-dependent economies.  Should commodity prices turn downwards again in the coming months, the tentative recoveries underway in these regions will certainly be cut short, adding to the economic hardships facing these regions’ rapidly-expanding populations.

Labor Shortages: While the economies of many countries with fast-growing working-age populations are not generating enough jobs to meet demand, the economies of many countries with shrinking working-age populations are creating more jobs than can be filled.  This is leading to labor shortages in many key sectors in economies such as the United States, Japan and Germany, and these labor shortages are holding back growing and driving up wage levels in these countries.

Overall, the level of economic risk in the world today is as high as it has been in recent years.  Still, there is a chance that cooler heads will prevail and that the threats to international trade and investment will recede.  However, there is also a significant risk that we are only in the early stages of what could become a full-blown global trade war, something that could result in a major global economic downturn, even one as severe as that which followed 2008’s financial crisis.