The Key Risks Facing the Global Economy
Over the past three years, the global economy has grown by an average of 3.3% per year and the forecast for 2015 calls for this level of growth to continue this year. It had been hoped that higher rates of growth would be achieved this year as the global economy entered into a more robust recovery from the global financial crisis, but instead, a much more tepid recovery has taken hold. Now, as we look ahead, there are few fears that another major slowdown for the global economy is in store. However, there are a number of major risks still confronting the global economy this year that could result in lower-than-forecast rates of growth in 2015.
The leading risk facing the global economy continues to be the potential for a prolonged period of very weak economic growth in the Eurozone. Overall, the Eurozone has benefitted from the sharp fall in the value of the euro in recent months as well as from a surge in export demand in the United States. Nevertheless, domestic demand levels in most Eurozone economies remains very weak and deflationary pressures continue to worsen across much of Europe. In the meantime, the latest financial crisis involving Greece has yet to be resolved, and while Greece is but a minor economic player, an unsatisfactory resolution to this crisis could result in a new financial crisis sweeping across southern Europe, impacting larger countries such as Italy, Spain or Portugal.
China’s economic slowdown also continues to pose a significant threat to the global economy this year, as in previous years, it has been China that has been the leading driver of global economic growth. Now, the Chinese government has reduced its economic growth target to 7.0% amid increasing signals that the Chinese economy is slowing at a pace much faster than the Chinese government had expected. This slowdown has been the result of both internal and external factors. Internally, retail sales and investment levels have fallen sharply so far in 2015, dampening hopes that domestic demand would become the key component of Chinese economic growth. Externally, the strong yuan and rising labor costs have lowered Chinese export competitiveness at a time when many of its key export markets are weak. As a result, China’s slowdown could worsen in the months ahead, removing a key pillar of economic growth in 2015.
So far, the United States economy appears in position to be the dominant driver of economic growth in 2015, much as it was for most of 2014. However, the recent surge in the value of the US dollar threatens to severely harm the US economy, particularly if the dollar continues to appreciate against the currencies of the US’ leading trading partners. Not only is the strong US dollar threatening US export growth, but it is also threatening to derail the much-hyped recovery of the United States’ manufacturing sector. As a result, consumer spending in the US will have to rise at an even faster pace in order for the US economy to achieve the expected 3%-plus GDP growth rates that are forecast for 2015 and 2016. Should this fail to materialize, the global economy will be left without a major pillar of growth this year.
Finally, many of the world’s leading emerging markets outside of Asia are continuing to struggle. During the years that followed the financial crisis, many of these non-Asian emerging markets were achieving very high rates of economic growth, providing major opportunities for exporters and investors. However, lower levels of foreign investment, coupled with poor economic decision-making in many of these countries, has resulted in sharp declines in economic growth rates in emerging markets outside of Asia. Furthermore, many of these countries have seen their export competitiveness levels fail to close the gap with their rivals in Asia, further dampening growth prospects. As a result, emerging markets such as Russia, Brazil and Argentina will remain among the world’s most disappointing economies in 2015, removing yet another potential driver of global economic growth.