The Strategist

On the Verge of Risk: What Has the Morrow in Store for the Global Economy?

09/14/2015 - 15:56

Security and political risks can seriously affect the world economy. The probability of these risks and the extent of how they may affect the global economy, are seriously different.

bdesham via flickr
bdesham via flickr
Taking into account these risks, Economist Intelligence Unit compiled a list of the top five risks, which "can seriously change the situation in the economy and business in the next two years".

These scenarios were rated according to their "risk level" or by degree of probability and consequences. The highest score - 25.

5. The growing threat of terrorism will destabilize the world economy.
Risk level: 12

"Islamic State" occupies of Syrian and Iraqi territory, and successfully recruits people around the world. In addition, the grouping pursues various aims, and has been quite effective so far.

- If the number of terrorist attacks grows, it will begin to have an impact on consumers and business, which can lead to serious consequences for the American and European markets, - the report says.

4. The difference in international financial policy leads to high volatility in the currency market.
Risk level: 16

The Fed is expected to raise its key rate this year, so investors have to see what happens as a result.

- The countries, that are most vulnerable to changes in the financial cycle, will find themselves in a situation of high budget deficits…Among them are also countries that depend on commodity exports. In this context, Turkey, South Africa, Russia and Venezuela look particularly vulnerable.

3. Tensions between Russia and Ukraine, the standoff in the spirit of Cold War.
The level of risk: 16

Relations between Russia and the West are reminiscent of the Cold War period. Most recently, the EU extended the sanctions, which were supposed to end in July, at the time Russia has not yet introduced a further economic retaliation, though started destroying imported food products illegally appear in the country.

- However, even without trade sanctions, weakening trade relations will have a negative effect on the Russian economy, which will also lead to a decrease in industrial production in Central and Eastern Europe, - the report says.

2. The sharp decline in commodity prices and the collapse of the Chinese market led to a slowdown in emerging markets’ growth.
The level of risk: 20

There are concerns about a slowdown in China's economy, as well as about the consequences of the Chinese market collapse and the devaluation of the yuan.

- Given the increasing dependence of Western manufacturers and retailers on the demand in the developing world, prolonged slowdown in the emerging markets would have serious consequences for the EU and the US.

1. Grexit could lead to Eurozone disintegration.
The level of risk: 20

- We continue to believe that there is a high probability of such an outcome in 2016, given the difficulties to be faced by the party SYRIZA when trying to apply the strict conditions prescribed in the new agreement with creditors.

If Greece really quits the Eurozone, it can end up with other countries withdrawing from too, and this in turn would greatly destabilize the global economy.

- The world financial system will face difficulties, and the global economy will slide into recession.

The conflict on the Korean peninsula

However in its report, EIU did not indicate another factor, another high risk for global markets and the world economy as a whole. This is the conflict between North and South Korea.

The Korean peninsula have been permanently balancing on the verge of war. In August, North Korea and South Korea "exchanged" artillery bombardment. At this time, the reason for opening fire were the speakers of the South, propagandizing among soldiers and residents of the North.

The conflict in the peninsula traces back in 1945. After the military collapse of Japan, Korea had been divided between the USSR and the USA. In 1950, a confrontation between the socialist North and the capitalist South grew into a large-scale war, which ended in 1953 with the creation of two states bordering on the 38th parallel.

Since then, the armed forces of the DPRK and South Korea have been organizing regular provocations against each other, both military and ideological. The two leaders have been issuing bellicose statements, but finally sat down at the negotiating table. However, the final settlement of the ongoing 70 years of conflict still remains out of the question.

The Republic of Korea is one of the most developed industrial countries, a powerful manufacturer and exporter of ships (tankers, container ships, chemical tankers), automobiles and electronics (computer equipment and parts, electronic devices, optical devices, televisions, information systems).

Therefore, in case of conflict on the Korean peninsula, the consequences for the world of business and the economy may be the most unexpected and unfavorable. First would be affected those countries that are major trading partners of the Republic of Korea, that is, USA, China, Japan and others.

based upon EIU's report