Eight Threats to the Global Economy in 2018
2017 has proven to be the best year for the global economy in recent years. In fact, when one considers that 2010 and 2011 were rebound years from the financial crisis, it can be argued that 2017 has been the best year for the global economy in more than a decade. This improvement has taken place despite the fact that political risk levels rose significantly in many areas of the world this year. Much of the good economic news generated in 2017 came from developed economies, many of whom had struggled mightily in previous years. Likewise, Asia remained a key driver of growth in 2017, despite rising risk levels in China and a disappointing year for the Indian economy. Of course, some economies continued to struggle this year, most notably commodity-exporting emerging markets, who continued to suffer from low prices for many natural resources and agricultural products.
Looking ahead, 2018 is forecast to be another year for relatively solid growth for the global economy, with overall growth rates forecast to be near to those recorded in 2017. Nevertheless, there are a number of threats that could derail economic growth in many of the world’s leading economies in the coming year. Here are eight economic risks to watch in 2018:
Stock Market Corrections: Market indicators suggest that the possibility of a significant stock market correction is on the rise in many leading economies. Should these corrections occur in 2018 (we currently forecast them to begin in late 2018/early 2019) consumer and business spending levels could fall, slowing growth in many leading economies, including the United States.
Eurozone Economy Without a Stimulus: The Eurozone’s economy has rebounded in recent years thanks to weak currencies, stronger export markets and large-scale stimulus programs from the European Central Bank (ECB). Now, the euro is strengthening, export markets are facing some headwinds, and the ECB is preparing to withdraw its stimulus programs, raising fears of a significant slowdown in Europe beginning later next year.
Chinese Debt: China’s level of total debt is now estimated to be in excess of 300% of GDP, one of the highest total debt levels in the world, particularly for an emerging market. China’s government is aware of the growing risk that this poses for the country’s economy and is likely to take more steps to bring this soaring debt under control. This is likely to lead to lower levels of consumer and business spending in 2018 and could result in significantly lower levels of Chinese economic growth.
Wealth Inequality: Wealth inequality levels continue to rise in most of the world’s leading economies, driven upwards by a combination of economic policies and the transformation of the world’s labor market. As wealth inequality continues to rise, support for populist, protectionist and nationalist political parties and leaders, on both the political right and left, will rise steadily, threatening to disrupt global trade and investment.
NAFTA: There is a better-than-50% chance that United States President Donald Trump withdraws his country from the NAFTA free trade agreement, despite strong opposition from many key industries in the US. This will have a major impact on businesses and industries in all three NAFTA member states over the near-term and could lead to severe supply chain disruptions should this decision be taken.
Housing Bubbles: The threat of a sharp decline in property prices in many of the world’s leading countries has risen, and already, a number of these countries are beginning to see real estate prices trend downwards. Among the countries much at risk from a bursting of their real estate bubbles in 2018 are China, Canada, Australia and Germany.
Inflation: Not long ago, deflation was a greater threat to the global economy than inflation. However, inflation rates are trending upwards and an external shock or two could send inflation rates much higher in many of the world’s leading economies. Among the countries facing the threat of rising inflationary pressures in 2018 are the United Kingdom, India, Mexico and Turkey
Geopolitical Risk: Despite the multitude of conflicts that have occurred since the end of the Cold War, they have had relatively little impact on the global economy. However, as many of the world’s leading economies are now facing the risk of becoming directly or indirectly in conflicts with one another, the potential for geopolitical risk to destabilize the global economy will rise in 2018.
Each of the eight aforementioned risks to the global economy has the potential to usher in a significant worldwide economic slowdown. For developed economies, the past few years have seen higher levels of growth, albeit levels that remain well below those recorded in the years before the financial crisis. Considering the stimulus programs that were enacted after the financial crisis to generate growth, these results must be considered both disappointing and fragile. With Europe and Japan withdrawing some of their stimulus programs, and with the United States still facing the potential threat of protectionism, developed economies continue face an uncertain future. For emerging markets, Asia has become the leading driver of growth, but its two largest countries, China and India, both face higher risk levels in 2018 that could result in disappointing levels of economic growth in those two key economies. For emerging markets outside of Asia, their growth is forecast to remain relatively low due to the fact that commodity prices are not expected to rise significantly next year.
As such, risk levels are on the rise, and this could spell bad news for the global economy, with a slowdown beginning perhaps as early as sometime next year. In fact, 2017 may prove to have been the year that was the calm before the storm should one or more of these threats become a reality.