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The Biggest Global Economic Risks 

Trump is more dangerous than terrorism

Each month, The Economist Intelligence Unit publishes a report with top-events that could destabilize the global economy. The just released ‘April 2016’-report marks for the first time ever a potential election of an US- presidential candidate as a top global risk. Here is the complete list in order of impact and probability:

China experiences a hard landing 

  • The top-risk is China. The country’s continued deterioration in the services and manufacturing sectors, the ongoing build-up of debt (which is now equivalent to 240% of GDP), and capital outflows have highlighted structural weaknesses in the economy and resulted in a market-driven depreciation in the Yuan’s exchange rate against the USD. Given the growing dependence of Western manufacturers and retailers on demand in China and other emerging markets, a prolonged deceleration in growth there would have a severe knock-on effect across the EU and the US – far more than would have been the case in earlier decades.

 

Russia’s interventions in Ukraine and Syria precede a new ‘cold war’

  • The stepped up deployment of NATO forces to Eastern Europe as well as Russia’s provocative tendency to fly its military aircraft over western European airspace, raise the risk of a direct confrontation. With this in mind, Western countries will begin to reverse their defense cuts of recent years, complicating efforts to rein in high fiscal deficits, and the continued uptick in tensions could also see a return of the political risk premium in oil prices.

 

Currency volatility culminates in an emerging markets corporate debt crisis

  • In December the Federal Reserve implemented its first rate increase in almost a decade. Although expectations regarding the pace of rate tightening have eased, the consequences will still be watched closely, given the history of emerging-market crises in the early stages of other US tightening cycles. Any rolling emerging-market debt crisis would cause considerable panic across the global capital markets, and may require governments in several economies to step in to shield their banks from the fallout – risking a repeat of the banking crises witnessed in Europe at the start of this decade.

 

Under external and internal pressures, the EU begins to crack  

  • The fluctuating euro zone debt crisis, prolonged recession, deep differences over the response to the influx of (mostly Syrian) refugees, and the fallout from the terrorist attacks in Paris has raised doubts over the cohesion of the EU. The erosion of the so-called ‘European Project’ has been evident in the response to surging levels of immigration and to the Paris attacks, with border checks and barriers reappearing across Europe. In the event that the EU began to fracture and land borders re-imposed, trade flows and economic co-operation would be hindered, harming growth in the world’s largest single trading block – and notably in trade-reliant Germany, which shares land borders with ten fellow Schengen members – and leaving the fragile euro zone states more vulnerable in the event of another economic downturn.

 

Grexit’ is followed by a eurozone break-up

  • Greece’s the future within the euro zone remains at risk. If a ‘Grexit’ were to lead to other countries leaving the euro zone, this would be hugely destabilizing for the global economy. Countries leaving the euro zone would suffer large devaluations and be unable to service euro-denominated debts. In turn, banks would suffer huge losses in their sovereign bond portfolios, resulting in major disruption to the global financial system and plunging the world economy into recession.

 

Donald Trump wins the US presidential election

  • The businessman has built a strong lead in the Republican party primary, and looks the firm favorite to be the party’s candidate in the US presidential election in November. Trump has given very few details of his policies but a few themes have become apparent. First, he has been exceptionally hostile towards free trade, including notably Mexico, and has repeatedly labeled China as a ‘currency manipulator’. Donald Trump in the White House could lead to a trade war and his proposed ban on Muslims in the United States would also serve as a powerful recruiting tool for jihad.

 

The rising threat oh jihadi terrorism destabilizes the global economy

  • Should the current spiral of terrorist attacks and reprisals escalate, it would no doubt begin to dent consumer and business confidence, which in turn could threaten to end the five-year bull run on the US and European stockmarkets.

 

The UK votes to leave the EU

  • If Britain did leave the EU (the referendum on Britain’s EU-membership takes place on 23 June) it would have negative ramifications for the UK – still the fifth biggest economy in the world, and whose exporters would struggle in the face of regulatory and tariff uncertainty, and whose position as a leading global financial services hub would be imperiled. However, it would also harm the EU itself, given that the UK is one of the few relatively fast-growing economies in Europe, and has also been a leading proponent of trade and services liberalization. Finally, a ‘Brexit’ could also exacerbate the ongoing global currency instability, notably in the West.

 

Chinese expansionism prompts a clash of arms in the South China Sea

  • Tensions in the South China Sea over disputed islands have escalated in recent years.Since 2014 reports have proliferated about dredging work by Chinese vessels, seemingly focused on turning reefs, atolls and rocks in disputed parts into artificial islands and, in some instances, military bases. This work has profound territorial implications: according to the UN Convention on the Law of the Sea. Any worsening of the row could seriously undermine intra-regional economic ties, and potentially interrupt global trade flows and simultaneously depress global economic sentiment more broadly.

 

A collapse in investments in the oil sector prompts a future oil price shock

  • The response of the world’s oil companies to lower oil prices should raise concerns about the long-term impact on future energy supplies. Around 400 billion USD-worth of oil and gas projects have been deferred or cancelled. The risk of an oil price shock in 2016-20 is low currently. However, the volatile geopolitical environment in the Middle East and eastern Europe, and the longer-term impact of a curtailing of investment in the sector provide an upside risk.

 

The potential of a President Donald Trump is one of the top ten risks to the global economy.

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