The biggest risks to the world economy in 2019



Over the next two years, the biggest risks to the global economy lie exactly where investors believe the least likely recession patterns will emerge. The main risks include a potential recession in China, an increase in long-term interest rates, and the rise of populist economic policies that undermine the authority of central banks and their independence, leading to a rise in government bond yields. The ongoing US-China trade war continues to strain over financial markets. Brexit is a risk that should not be underestimated. The dramatic development of the events poses an additional risk to the British economy and that of Europe, as well as to the stability of the pound.

Of course, there are a number of other risks to global growth, including the continuing political chaos in the United States. The state broke off the government's partial suspension, but Trump wanted the wall. A chaotic and confused Brexit, which brought a lot of political turmoil, shook the financial markets and shaken confidence in the politicians of the island. The increased geopolitical risks - the tough negotiations between Trump and the leader of S. Korea and the tensions in Venezuela remain strong for future relations between the countries. Italy may have solved its debt problems (temporarily), but alas the country has fallen into recession. The risks listed here threaten critical sectors such as the automotive sector - highly developed in Scandinavia and Germany - regions heavily vulnerable to recessionary impacts. In case of Brexit's failure, Britain is a potential candidate for recession. From a political point of view, we see serious semi-re-attempts in France and "yellow vests". In Germany, at least in a more peaceful way, the political spectrum is also beginning to change. The trade war has several fronts: the United States vs. Europe, the United States against China and the United States against Mexico and Canada. What if the United States does not understand Europe? Tariffs will be tightened, further stifling economies, especially those that are heavily dependent on exports.

A less, but more dramatic, external risk would arise after many years of decline - global long-term interest rates - their uptaking, as has begun in the US, remains a huge risk. Earlier forecasts for a strong tightening of the Fed's fiscal policy have contradicted their surprise move to slow down. However, the persistence of the rise policy may be a problem, but this will mostly affect short-term interest rates. The effects of short-term interest rates are much easier to absorb and correct, but the focus is shifting to long-term ones that are still at their lowest levels in the modern era (except during the Second World War, but then the markets were not so developed).

A continuous increase in interest rates is not impossible. There is sufficient explanation for the long-term interest rate trend, as some factors may be temporary and it is difficult to establish empirically their burden according to the various effects they have on the economy. What can cause a rise in global interest rates? An exemplary sharp rise in production activity. If the Fourth Industrial Revolution of Professor Klaus Shwab starts to exert a much faster and stronger impact on economic growth than expected. However, this overall will be beneficial to the global economy, but it can put pressure on regions that can not keep up with the pace. Another reason could be the sharp slowdown in Asian countries, such as the "cooling" of the Chinese economy, which could push the entire Asian region into a high-deficit zone.

But perhaps the most likely cause of global interest rate hikes will be the "explosion" of populist beliefs that are being planted in many places around the world. And they are gaining inertia and power to the point where they are redefining conservative economies of recent decades. Threatened seeds of populism are distrustful and doubtful about the world markets, so much as we are questioning how much the national debt of a nation is in fact safe. This may increase the risk premia on interest rates, and if governments do not adapt quickly enough, budget deficits will increase. Markets will therefore increasingly doubt their governments, and the consequences remain unclear.

Most economists agree that with today's low long-term interest rates, advanced economies can hold significantly more debt, but there is no free lunch. High debt levels make it more difficult for governments to respond adequately to aggressive economic shocks, whether they are financial crises, cyberwar, pandemics, or a trade war that goes beyond expectations. Failure to respond adequately raises the risk of long-term stagnation. That is why an association between the high levels of debt and the slowing of long-term growth - one leads to the other.

If progressive policies rely too much on the debt (instead of imposing higher taxes on the rich) on income distribution, we can easily imagine the markets being in doubt that countries will overcome these high levels of indebtedness. If they do succeed, it will push interest rates up again.

We are witnessing how the considerable slowdown in the Chinese economy is gradually unfolding. Indeed, Donald Trump's trade war has shaken investor confidence, but this is only a partial negative push for China's economy, which is slowly but gradually making an important economic transition. An export-oriented country, China, forms an economy driven by investment on the road to sustainable home consumption and development. How long to slow down the Chinese economy is an open question, given the contradiction between the increasingly centralized political system and the need for a more decentralized consumer-led economy, the slowdown in long-term growth may be far more dramatic.

Unfortunately, avoiding this transit period is not an option. China can not always "advertise" as an exporting country and attract only the interest of property investors. The state is now a dominant global exporter and there is no longer any market niche or political tolerance to allow further expansion of this model. Maintaining growth through investment is still a great challenge. Especially in the construction and real estate market. Price suppression, especially from highly developed cities, has made households increasingly difficult to invest in real estate. Although China is in a better position than most of its Western rivals to absorb potential losses on the banking sector, a sharp contraction in housing prices and the activity of the construction sector may prove to be painful after all.

Any significant moment of recession in China will hit the rest of Asia hard and lasting. Emerging economies, heavily dependent on raw material exports and developing countries, will take the spear blade hardest. Europe is already feeling the pain, especially Germany. Although the United States is less dependent on China, the tragedy on the financial markets and the export-sensitive sentiment will turn the Chinese delay far more unpleasant than the US seems to realize. The Turkish economy has also fallen into a recession, which poses a risk to the Turkish lira and the country's economic relations with its partners. 18 months of continued economic growth, which turned Turkey into a leading emerging market, were disrupted.

So, with all these risks, are the prospects for global growth really grim? There are, of course, positive risks. Indeed, the US economy is still showing strong growth, and Europe has the potential to float above water, but only if it continues with its slow gradual growth, which will take time to recover from the previous European debt crisis. The Chinese economy has a habit of disproving the doubts of those who watch it with disregard. So 2019 has the potential to bring us another year of good growth for the world economy. Growth, but at the expense of what?

 Jr Trader Martin Nikolov

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