10 October 2018

The Top Ten Threats to the Global Economy in Late 2018

Despite a great deal of political and economic turmoil, the global economy has managed to continue to expand at a relatively strong pace thus far in 2018.  In fact, some of the world’s most important economies (such as the United States, China, India, Australia and South Korea) have recorded very strong rates of economic growth in recent months, even as many of these countries are embroiled in major trade disputes with one another.  However, there are clouds on the horizon, as numerous threats to the health of the global economy are becoming apparent.  In fact, some of these threats have the potential to severely derail the global economy at a time when it has been performing better, for the most part, than at any time in the past decade.  

Here are ten of the most significant threats to the global economy in the final months of this year:

A US-China Trade War: The imposition of more and more tariffs on one another’s imports by the world’s two largest economies is a major threat to the health of the global economy.  Already, China’s stock markets have faced significant declines, while Beijing has been forced to take steps to boost its economy in the face of US tariffs.  As for the US, inflationary pressures could worsen as imports from China become more expensive.  For the global economy, the fact that a full-blown trade war between the US and China would certainly spread to other markets is one of the greatest risks for the health of the world economy in the coming months. 

Uncertainty in China: This potential trade war with the United States is coming at a bad time for the world’s second-largest economy.  With debt levels rising and confidence levels wavering, China is facing the prospects of a decline in economic growth as well as higher degrees of volatility in the coming months.  For a government that is focused on stable growth, these crises have the potential to cause a great deal of damage to the Chinese economy.

Capital Outflows from Emerging Markets: As interest rates rise in the United States and the US dollar becomes stronger, the potential for even higher levels of capital outflows from emerging markets is rising.  Already, emerging markets such as Turkey and Argentina have fallen victim to this set of circumstances, and a number of other emerging markets (particularly those with large current account deficits) are vulnerable to the impact of higher interest rates in the US and a strong US dollar.

Rising Debt Levels: While most governments took steps to reduce debt levels in the wake of the global financial crisis, a number of countries remain at risk from high levels of debt.  While government debt remains the focus of many of these concerns, the larger threat may come from private-sector debt, particularly in China, where overall debt is approaching 300% of GDP.  Italy is another country that could face a debt crisis in the near-future, one that would severely destabilize the European economy.

Europe’s Slowing Economy: Europe had hoped that the momentum it gained in recent years would carry over into 2018 and allow the once-crisis-ridden region to record another year of solid economic growth.  Instead, growth rates have fallen in most of the region’s leading economies, with France and Italy performing particularly poorly so far this year.  Meanwhile, Europe’s economy remains vulnerable to the potential impact of a global trade war and the potential for a no-deal Brexit.

Latin American Woes: While some South American countries such as Chile and Peru have pulled out of their recent economic slumps, most economies in Latin America continue to record very low levels of growth.  Worse, Venezuela’s economy is in free-fall, while Argentina is entering what could be a very severe recession.  Meanwhile, the outlook for the region’s two largest economies (Brazil and Mexico) calls for more anemic growth in the months ahead.

Rising Oil Prices: Quietly, oil prices have risen by nearly 40% over the past eight months, with oil prices reaching their highest level since 2014.  While this is welcome news for those oil-exporting economies that were devastated by the sharp fall in the price of oil in 2014, it is bad news for oil-importing countries that are already dealing with numerous other threats to their economic well-being.  Worse, it appears as if oil prices could yet rise further in the coming months. 

Middle Eastern Politics: Political volatility in the Middle East remains dangerously high and this is having a major impact on many of the region’s leading economies, including Turkey, Iran and Saudi Arabia.  Should this volatility increase, this region’s economic struggles, which have persisted in recent years, could worsen in the months ahead.  Worse, a major increase in volatility, or a conflict in oil-producing regions of the Middle East, could lead to soaring oil prices, something that would destabilize the entire global economy.

Populism: Right-wing and left-wing populism continues to make inroads around the world, as evidenced by the results of major elections this year in Brazil, Italy, Mexico and elsewhere.  In some cases, new populist governments have enacted policies that have rattled the markets and raised fears of a major economic crisis, such as in Italy.  In other cases, populist policies have led to a short-term surge in economic growth, but at the expense of longer-term economic stability. 

No More Ammunition: Given the fact that governments and central banks used almost every tool at their disposal to revive their countries’ economies in the wake of the global financial crisis, and that many of these tools are still being used, there are few options available to governments and central banks today should another major economic crisis arise.  This has raised fears that the global economy could be on the brink of yet another major crisis, one that could cause massive damage to many of the world’s leading economies that have few weapons left to combat this threat.

Over the near-term, overall growth for the global economy is likely to remain strong, particularly as economies in Asia and North America continue to grow at a strong pace.  However, it is already evident that some weakening is underway in many key economies, and this slowdown could be exacerbated by any number of the ten threats mentioned above.  In particular, many of these threats have the potential to severely reduce business and investor confidence, a development that could lead to major declines in trade and investment in the future.  While consumer confidence levels remain relatively high in most major economies, any threat to consumer spending growth will be viewed as a major risk to the global economy, as it has been consumer spending that has been the driver of much of the global economy’s recent growth.  As such, while there has been much good news on the economic front in recent months, the clouds on the horizon have become a little darker, threatening to end what has been a run or rather consistent growth for the global economy in recent years.