10 March 2020

The Five Leading Threats to the Global Economy Right Now

Even before this year started, it was clear that economic risk levels were going to be higher than at any time since the global financial crisis. Nevertheless, while risk levels were rising, hopes were still high that the slowdown that began in late 2018 would result in nothing but a soft landing for the global economy.  In 2018, growth slowed in some parts of the world, most notably Europe, but this slowdown was relatively mild.  As the US-Chinese trade war heated up in 2019, that year saw economic growth rates trend downwards in nearly all of the world’s largest economies, resulting in increasing concerns that the global economy was headed for a deeper slowdown.  These concerns have multiplied as the global economy has been dealt a series of blows over the first two months of this year.  As we look ahead, here are the five biggest risks to the health of the global economy for the remainder of this year.

The Impact of the Coronavirus Crisis: An unforeseen threat when this year began, China’s (and now the world’s) coronavirus outbreak is now the single biggest risk to the immediate health of the global economy.  With over 81,000 cases of this diseases, and more than 2,700 deaths caused by it, the coronavirus has spread fear throughout the world.  So far, the greatest impact has been on China, particularly the central Chinese province of Hubei, where most of the cases and fatalities from this epidemic have occurred.  This has already had a major impact on demand levels inside China and could result in a sharp decline in economic growth in at least the first quarter of this year.  Meanwhile, China is now a key export market for many of the world’s economies, while at the same time, China’s role in global supply chains has grown dramatically in recent years.  Should this crisis worsen, the impact on the Chinese economy will be massive, while the impact on the global economy will also be substantial, particularly on the demand side as supply chains are further disrupted.

A US-EU Trade War: The global economy was given a needed boost earlier this year when trade tensions between the United States and China began to ease (for the moment).  However, a new trade war is on the horizon, one involving the United States and the European Union.  Over the past couple of years, the US and the EU (or sometimes individual EU member states) have been engaged in tit-for-tat disputes that often have led to the imposition of tariffs on one another’s imports.  However, the potential for much greater disputes over trade, taxation and subsidies between the US and the EU has risen sharply, one that could lead to a full-blown trade war between the two sides.  For the US, such a trade dispute would not be welcome at a time of growing global economic risk and with a presidential election looming.  For the EU, a trade war with the US could be devastating, given the poor current state of the European economy and Europe’s dependence upon exports for much of its growth.

Rising Levels of Political Uncertainty: The level of political uncertainty in most of the world’s leading economies has been relatively high in recent years and it appears to be rising in 2020.  The world’s largest economy, the United States, faces what might be one of the most divisive presidential elections in its history later this year.  In China, President Xi Jinping faces mounting public anger of his government’s handling of the coronavirus crisis and China’s slowing economy.  In Europe, Brexit may have come to pass, but European unity is fraying and the formation of governments in many European countries is becoming more difficult due to the political fragmentation underway across that region.  Altogether, this higher degree of political uncertainty is likely to further reduce consumer, business and investor confidence in the coming months, to the detriment of the global economy.

The Threat of a Recession in Europe: Over the past year, the economic outlook for Europe has steadily deteriorated, raising concerns that the region was headed for its fourth recession in the past eleven years.  In the fourth quarter of last year, the European Union’s economy expanded by just 1.1% on a year-on-year basis (0.1% quarter-on-quarter), resulting in the EU’s economy expanding by 1.2% in 2019, its worst annual performance since 2013.  Much of this slowdown could be attributed to the struggles of the EU’s largest economies, with the German economy stagnating in the fourth quarter of last year, and the French and Italian economies shrinking during that period.  Meanwhile, the outlook for 2020 continues to worsen as domestic demand weakens and the region’s external outlook deteriorates due to falling export demand in key markets such as China.  Given most European economies’ high level of export-dependence, the coronavirus crisis and other factors have the potential to severely weaken Europe’s economic health this year.  As a result, there is now a significant chance that the European economy will fall into a recession in 2020.

A Collapse in Commodity Prices: With the exception of food and agriculture prices, most commodity prices have fallen sharply in recent months, a trend that began before the coronavirus crisis emerged as a threat to the global economy.  For example, oil prices have fallen by nearly 25% since the beginning of this year and are now less than half of what they were during the first half of the 2010s.  This has added to the misery facing many of the world’s oil-exporting countries, particularly those that have few other sources of revenues.  Mineral prices are also down, adding to the downwards pressure on many other economies.  In fact, given the over-dependency on commodity exports for many economies, especially large numbers of emerging markets, this recent downwards trend for commodity prices is a very big concern and one that could depress economic growth in dozens of countries around the world.  Should the coronavirus and other threats to the global economy have a larger impact than expected, commodity prices could still have much further to fall in the coming weeks and months.

Given the uncertainty surrounding the coronavirus and its potential impact on the global economy, predicting the direction of the economy in the coming months is proving to be particularly difficult.  Even before the coronavirus emerged as a major risk factor, 2020 was looking as if it would be a challenging year for many major economies.  Now, with risk levels rising, economic growth in 2020 is most likely to be below the level that was forecast at the beginning of this year.  Still, there is room for a recovery, especially if the coronavirus crisis can be brought under control.  Nevertheless, as that crisis continues to spread and other negative factors remain in place, the level of downside risk facing the global economy has increased significantly.  In fact, as it stands now, 2020 is shaping up to be the worst year for the global economy since 2009, and the potential for a major economic downturn this year cannot be ruled out at this time.