LONDON, 17-4-2015 — /EuropaWire/ — While there are clearly risks, the seismic events the world economy endured over four years – a doubling in oil prices, a major financial crisis, the worst recession since WW2 and the euro crisis – have left such a lasting impression that potential opportunities are given less attention.
In this special report from Standard Chartered Global Research, we identify the three biggest risks and three most likely opportunities in the global economy and find that they revolve around four main uncertainties:
The euro crisis: Re-emerging or set to fade?
The euro crisis is seen as either a risk or an opportunity. Arguably, the euro area still has not done enough to ensure its integrity if there are new shocks such as another recession or a political upset in a major country. On the opportunity side, if Greece settles down soon, France and Italy achieve some reforms and euro-area growth picks up, fears could be put to rest.
China: Stabilising soon or further major downside?
China is also potentially either a risk or an opportunity. With excess capacity and debt, investment can no longer drive growth. Reforms are in train, though they may not sufficiently compensate. But the economy has already slowed significantly and further monetary easing and reforms could soon bring a better outlook.
Interest rates: Too much concern over higher US rates?
Everyone is focused on the expected rise in US rates but, with inflation low, the Fed is unlikely to raise rates very fast and increases have been well flagged. The euro area, Japan and China are still adding to global liquidity. We may see continuing global growth combined with ongoing flush liquidity for a long time yet.
Political tensions: Rumbling threats with potentially big consequences
Disputes in Eastern Europe, the Middle East, the Korean peninsular and maritime Asia all have the potential to erupt into a more serious crisis, damaging business confidence, affecting trade and, most immediately for markets, creating big capital flows out of risk assets and out of regions directly affected. Politics is perhaps the biggest uncertainty, but it is also worth remembering that governments have strong incentives to avoid conflict.
In 2007-08 few were prepared for the scale of the shocks coming. Balance sheets were extended, risk-taking was rife and regulators had their eye off the ball. Now balance sheets are much more conservative and potential risks are front-of-mind for business, investors and the authorities.
There are still some reasons for concern. The potential for new fiscal or monetary easing in developed markets is limited and political and geopolitical strains could make shocks more likely or blunt a coordinated policy response. However, low inflation almost everywhere provides considerable comfort, and means central banks can be very cautious and accommodative but true to the fixation on risk, many worry that inflation is too low, threatening deflation.
In our special report, two clear themes dominate our choice of opportunities: when risks recede and when growth prospects decisively pick up due to supply side reforms. In our first major opportunity we explore the possibility that Fed rate increases will have much less impact than many fear. Two further cases where opportunities arise because risks recede are for the euro area and China. In both cases faster recorded growth would likely be a key catalyst.
John Calverley, Head, Global Thematic Research, commented: “There are important risks and uncertainties in the global economy. But there are also significant potential upsides which can easily be forgotten. Risk and uncertainty never goes away; the belief that they have is dangerous, as we saw in 2007-08.
“But the experience of 2008-12 still seems to dominate people’s thinking. It is holding back investment and growth. It may also be holding back interest-rate normalisation, particularly in the US where the case for tightening soon seems strong.”
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