The Top Five Economic Risks in 2017

Over the past decade, global economic risk levels have reached their highest point since the early 1940s as a series of factors ranging from demographic decline to rising debt levels have combined to add a great deal of risk into the global economy.  Last year, hopes were rising that this high level of economic risk would finally begin to recede.  Instead, new factors such as the rise of populist political leaders and the growing threat of protectionism have added even more risk into the global economic system as we begin 2017.  Moreover, the overall outlook for the global economy remains relatively poor and this is both a cause and a product of the higher risk levels that the world is facing this year.  Below are five of the leading risks to the global economy in 2017, each of which has the potential to cause major problems for the world’s leading economies this year. 

Protectionism: Without a doubt, the leading long-term risk to the global economy that is emerging as a major threat in 2017 is the growing support for protectionist economic policies in many of the world’s leading economies.  For years, protectionist sentiment has been on the rise, driven by rising wealth inequality, immigration shifts, and the loss of manufacturing jobs across much of the developed world.  In 2017, protectionism will be a major issue in the United States and Europe.  In the US, the incoming Trump Administration has vowed to restore US manufacturing jobs, even if it is at the expense of some of the US’ leading trade partners.  In Europe, protectionism will be a major issue in most of that region’s key elections in 2017, particularly in France, a country where manufacturing output has fallen sharply in recent years.  The spread of protectionism will prove to be a major risk to the long-term health of the global economy, as overall, the global economy has benefitted from the surge in trade and investment that has taken place over the past few decades.  Should protectionism severely reduce trade and investment levels, the global economy will realize far lower growth rates in the coming years and could enter into a period of prolonged decline. 

European Troubles: Europe has bounced from crisis to crisis over the past decade and the region’s economy has barely managed to record any growth during this period.  In 2015 and 2016, growth did return to most European economies, but at a relatively low level.  Now, this fragile recovery could be coming to a premature end as Europe is once again facing a number of major threats to its economic health.  First and foremost, Britain’s impending withdrawal from the European Union will be a blow to both the UK and the EU economies beginning this year, as the UK has been the leading driver of economic growth in the EU over the past 20 years.  Southern Europe will also remain a major source of risk for the European economy.  This year, Italy’s fragile banking sector will flirt with disaster, even after it recently received a $21 billion bailout.  Greece too will remain a serious threat to the European economy, as a tourism-fuelled recovery is not enough to improve that country’s precarious financial state.  Finally, lower levels of economic growth in 2017 will fuel protectionism and populism in Europe, something that is a long-term threat to the region’s economic (and political) integration.

Chinese Debt Levels: China has been the world’s leading driver of economic growth over the past decade and as provided businesses and investors with a major source of growth during this period.  However, as China becomes an ever-increasingly-important component of the global economy, it is also becoming a major threat to the health of the global economy.  In 2017, China will face a number of major threats that will be a source of risk for both its economy and for the world as a whole.  Of all of the threats facing the Chinese economy, rising debt levels might be the most worrying.  China’s overall debt now totals more than 250% of its GDP, an unprecedented level of debt for an emerging market.  Moreover, most of this debt is in private hands, as corporate and household debt in China has soared over the past five years.  These rising private debt levels could have huge ramifications for China’s banking sector, as well as on business and consumer spending in China, in the coming years.  Should this issue become a crisis, the implications for the global economy would be massive, as China is expected to contribute nearly 25% of the overall global economic growth over the remainder of this decade.

Diverging Currencies: In recent months, we have already seen a great deal of movement in exchange rates among many of the world’s leading currencies.  Moreover, it appears that the currency movements that accelerated last year are likely to continue in 2017, given the deep divisions in terms of monetary policy among the world’s leading central banks.  On one hand, safe haven currencies are likely to continue to strengthen in 2017, as economic risk levels remain high, thus spooking investors.  None will be more powerful that the US dollar, which has already reached a 14-year-high in terms of trade-weighted strength in early 2017.  In contrast, most of the world’s leading export-driven economies will see their currencies weaken further this year, as few of them will move to raise interest rates in the near-future.  As a result, there is likely to be a major divergence between the US dollar on one side and most of the world’s other leading currencies on the other.  This will raise concerns of a currency war that could further fuel protectionism, concerns that were first raised in the early part of this decade, but until now, never came to fruition. 

Lower Natural Resource Prices: After a spike in the price of oil and many other natural resources in recent weeks, the world’s leading natural resource exporters are hopeful that this trend will continue in 2017, allowing their economies to recover from the impact that low natural resources have had on them in recent years.  However, there are a number of signs that suggest that natural resource prices could trend downwards once again over the course of this year.  The most important threat comes from demand, as the potential for lower economic growth in key natural resource importers such as China and Europe could lead to demand levels not meeting expectations in 2017.  The supply side is also a risk, as supply levels of oil and many other key natural resources could exceed expectation this year, thanks in part to the recent spike in natural resource prices.  The recent deal between OPEC and many non-OPEC oil producers to cut oil output is a good example of this threat.  While this deal was broadly welcomed by most oil producing countries as it raised oil prices by nearly 20%, there are already signs that a number of countries that are part of this deal may be seeking ways to avoid their agreed-upon reductions in oil output.  Overall, it has been emerging markets that have been hit particularly hard by the low natural resource prices in recent years, and it is these emerging markets that stand to lose from another year of low prices for the natural resource exports.