Since 2009, investors in global financial markets have largely ignored risk, constructing a favorable narrative around events and rallying on any information.
Now, economic and non-economic risks are both on the rise.
In 2014, growth in advanced economies disappointed. Europe flirted with recession. Even the fireworks of Abenomics could not prevent Japan from sliding into its fourth technical recession in six years. The U.S. and U.K. were the cleanest dirty shirts in the laundry. But even these economies grew below-trend.
Around the globe, recovery in employment and income levels is lackluster. Business spending remains weak. Growth in global trade has slowed. Low interest rates are driving speculative housing booms.
Compounding the problem is low inflation. In both Japan and Europe, there’s concern about deflation. Abundant liquidity has not led to anticipated price increases. This reflects slow circulation of money, weaknesses in the bank sector, surplus capacity, and a lack of pricing power.
This combination of modest economic growth, low inflation or deflation and high debt levels is toxic. As income levels fall, the ability to service debt declines. A shrinking economy increases debt-to-GDP levels.
Emerging markets have lost momentum. Chinese and Indian economic momentum has slowed. Growth is below peak levels and what’s needed to absorb new entrants into the work force and maintain a fragile social and economic equilibrium. Brazil, Russia and South Africa are at a standstill, victims of weak commodity prices.
The slowdown in China affects the complex global supply chains, setting off a chain reaction from Southeast Asia to Eastern Europe. It also affects Australia, New Zealand and Canada, which had been insulated from the worst of the great recession and its aftermath by high prices and rising volumes of commodity exports.