- Simultaneous slowdowns and high inflation biggest risks to world’s largest economies
- Danger of permanently higher commodity prices because of supply disruptions
- Chinese hard landing1 and worsening trade war between US and China also risk factors
Market research company Euromonitor International’s Global Economic Forecast in Q2 2023 has released its Global Risk Index, citing possible stagnation in economic activity combined with high inflation as the main dangers facing the UK, US and Eurozone economies for the rest of 2023 and early 2024.
The Global Risk Index ranks the various risks to the global economy by the expected level of impact it would have on global growth and the likelihood the risk scenario would happen. The higher the score, the higher the risk of the scenario to the global economy.
Euromonitor analysts say that energy supply and pricing uncertainties are likely to undermine business confidence and investments which in turn could result in stagflation2.
The global economy also faces the risk of permanently higher commodity prices, as intensified geopolitical tensions could lead to further disruptions to energy and food supplies, or production and export of commodities could decline due to conflict or decisions from key suppliers, such as intergovernmental oil exporting organisation, OPEC.
Other key risks include a Chinese hard landing – a shift or downward turn in the Chinese economy that has rapidly experienced growth – and a worsening trade war between the US and China.
Global stagflation probability assigned at 30%, US-China trade war at 10%
Euromonitor assigns a 30% probability to the global stagflation scenario. Commodity price hikes, Chinese hard landing and a US/China trade war are all estimated to have a 10% probability risk level.
Analysts have been assessing both global stagflation and bounce back scenarios. With stagflation, global real GDP growth slows to 0.4% in 2023 and remains stagnant in 2024. In addition to weaker growth, global inflation rises to 7.7% in 2023 and 6.1% in 2024.
In the global bounce back scenario, the economy benefits from better-than-expected economic and geopolitical developments. This results in global real GDP growth of 3.6% in 2023, an increase of 1.1% and inflation remains largely unchanged in 2023 and 2024.
Lan Ha, Head of Practice, Economies, at Euromonitor International, said: “The primary risk driving the global stagflation scenario in 2023 is further disruption to global energy and food supply in the context of the war in Ukraine. This would ignite a resurgence of global inflation and increase the likelihood of more persistent price pressures in the global economy.
“Worse-than-expected simultaneous slowdowns in the world’s largest economies also raise the risk of global stagflation. In the UK, US and the Eurozone, this is due to increasingly restrictive monetary policy while labour shortages create persistent price pressures that are less sensitive to higher interest rates. In China, this is due to lingering economic challenges, particularly the stress in the country’s vast real estate sector, even amid its ongoing post-pandemic rebound.
“We could see a bounce back if there was a de-escalation of the war in Ukraine and increases in public and private consumption. Under this assumption, the global growth outlook would improve substantially, behind the significantly reduced risk of energy and food price spikes, improving business and consumer confidence and a partial resumption of trade.
“The Eurozone would be a particularly strong beneficiary here leading to spill over effects beyond the region. The global bounce back scenario assumes a faster-than-expected and sustained economic rebound in China after its reopening post Covid in late 2022.”
1 ‘Chinese hard-landing refers to a shift or downward turn of an economy that has rapidly experienced growth previously
2 Stagflation is an economic cycle characterised by slow growth and a high unemployment rate accompanied by high inflation