26 December 2018

The Ten Leading Economic Risks in 2019

2018 has proven to have been a pretty good year for the global economy as a whole.  For the second consecutive year, global GDP growth is forecast to be 3.7% for the year, the highest rates of global economic growth since the beginning of this decade.  However, this apparent consistency in terms of economic growth masks some major discrepancies in terms of the performance and health of many of the world’s leading economies.  For example, much of the growth in 2018 was driven by Asia and North America, with the United States economy performing better than at any time since the financial crisis.  In contrast, Europe’s economic outlook deteriorated over the course of 2018, while the revival of many emerging markets outside of Asia has proven to be very disappointing.  

Looking ahead at 2019, the global economy is facing many risks that threaten to reduce the level of economic growth in the coming year.  Worse, should a number of these threats to the global economy come to fruition, there is an elevated risk of a major global downturn next year.  

Here are ten of the most dangerous threats to the global economy in 2019: 

  • A Downturn in Sync: There is a strong likelihood that growth will slow in each of the world’s leading economies next year, including the United States, China and Europe.  If these slowdowns are worse than expected, the global economy as a whole will likely suffer a major slowdown.  Since the financial crisis, the global economy has been driven by either strong growth in China and other Asian emerging markets, or by an improved performance by North America and Europe.  If each of these key drivers of growth slows in 2019, businesses and investors could find it much harder to find growth markets in the year ahead.
  • A Major Slowdown in China: It is no secret that the GDP growth figures for China are largely an artificial construct created in Beijing.  Even so, it is clear that the Chinese economy slowed by an even greater level than the country’s official GDP figures suggested in recent months.  Should this actual slowdown worsen in 2019 as the impact of the trade war with the US continues to spread and as internal risks such as rising debt levels deter spending and investment, China could find itself in the midst of a severe economic crisis.  As China is now the leading contributor to global economic growth, such a crisis would have ramifications for the entire world.
  • Europe’s Recovery Cut Short: After three recessions in quick succession, Europe’s economic recovery in recent years was welcome news for the global economy.  However, this recovery was built on shaky foundations and the recent slowdown in Germany and other key European economies has raised fears that Europe’s recovery is quickly losing momentum.  Worse, too many key European economies (Italy, France, etc.) are lagging far behind their international rivals in terms of competitiveness, while much of the region depends upon exports to generate growth.  Finally, the impending withdrawal of the United Kingdom from the European Union in the spring of 2019 is certain to do little to boost confidence in Europe’s economic future.
  • A Global Trade War: Despite the recent renegotiation of the NAFTA free trade agreement and the ceasefire in the trade war between the United States and China, there are many reasons to believe that the threat of a full scale global trade war remains real.  As the US’ trade deficit with China continues to rise, it is unlikely that the Trump Administration will not seek to force China to further rebalance its trade relationship with the US.  Likewise, protectionist sentiment is on the rise in many of the world’s leading economies as globalization and automation continue to leave many people behind in their wake.
  • Increasing Market Volatility: The likelihood of a higher degree of market volatility in 2019 is significant, even when compared with the relatively high levels of volatility on markets around the world in recent months.  A key danger stems from the possibility of a significant correction on the world’s stock markets, as valuation levels in the United States and elsewhere remain dangerously high.  Should this market correction fall in the range of 5% to 15%, the global economy will likely weather the storm.  However, should this market correction exceed 15%, this would undoubtedly lead to lower rates of economic growth in many key economies in 2019.
  • Exposed Emerging Markets: For emerging markets outside of Asia, the past few years have proven to have been quite difficult.  Three factors have led to these difficulties for emerging markets.  First, they have suffered from low levels of economic competitiveness vis-à-vis other key economies.  Second, they have suffered from the fall in commodity prices since 2014. Finally, they have seen investment flow out of their countries as monetary policy in the United States has changed.  Unfortunately, all three of these factors could be in play in 2019, prolonging the misery for many of the world’s emerging markets.
  • Rising Debt Burdens: Many of the world’s leading economies are facing rising debt burdens that could begin to prove to be too much to bear for these economies in 2019.  Unsustainable debt burdens have already claimed victims such as Argentina and Pakistan in recent months, and more heavily-exposed economies will be at risk next year as interest rates in the US rise and as government revenue growth in many countries is well below expectations. Meanwhile, the world’s leading growth market, China, faces a potential debt crisis of its own, as the country’s overall debt level rises to more than 300% of GDP, and as more and more of these debts begin to mature. 
  • Labor Shortages: While unemployment remains a major problem for too many countries, some of the world’s leading economies are facing the opposite threat, the problem of labor shortages.  Important economies such as the United States, Japan and Germany all have unemployment rates below 4% and many sectors of these countries’ economies are finding it hard to find workers.  This is holding back the potential growth of many key economic sectors, while forcing such contentious issues as immigration and automation to the fore, issues that are driving support for populist policies in these countries.
  • An Oil Price Collapse: When oil prices rose sharply in September and October of this year, some commentators claimed that oil prices were on their way back to the high levels last reached in 2014.  Instead, oil prices have fallen by more than a third over the past few weeks and there are fears that, as US production increases and as demand levels fail to meet expectations, the price of oil could fall much further in the months ahead. While this would free up some consumer spending in oil-importing countries, it could prove to be a devastating blow for those oil producing countries that have suffered greatly in recent years.
  • Worsening Wealth Inequality: In nearly all of the world’s leading economies, the level of wealth inequality has risen substantially in recent years, as corporate profits have risen at a much faster pace than wages.  Moreover, key industries are increasingly dominated by a smaller number of companies, further concentrating wealth in the hands of the few.  Should inequality continue to increase, support for protectionist economic policies will undoubtedly increase, threatening to disrupt global trade and investment.  2019 could prove to be a decisive year in the efforts to reduce the level of wealth inequality, or it could be the year in which this inequality rises to even higher levels.

Nearly all economists are predicting a slight slowdown for the global economy in the coming year.  With GDP growth in 2018 forecast to remain at 3.7%, it is likely that GDP growth will fall to 3.5% in 2019.  However, should a number of the aforementioned threats to the global economy come to fruition in 2019, then the global economy could experience a much sharply downturn.  It is important to remember that the financial crisis of 2008 and 2009 left the global economy in a much more vulnerable state as the policy-makers in the world’s leading economies exhausted the tools at their disposal to combat this crisis.  Now, the world is left will few weapons to combat a future crisis, leaving it vulnerable to the threat of another major downturn.  As such, businesses and investors are certain to remain nervous in 2019, and this uncertainty is warranted given the multitude of risks facing the global economy as we prepare for the next year.