New thinking

Warning: global risk ahead

The global economy could be rocked by multiple risks in 2020 including a pandemic, trade wars, currency wars, rising valuations and populism. What are the real risks to your business?

2020 is shaping up to be another year of slow growth coupled with some potentially big-hitting risks for organisations doing business across international borders.

Global uncertainty, inefficient markets, the potential impact of Novel Coronavirus, and regional and national issues will require nerves of steel for business leaders.

Yet global bond and equity markets ended the year at an all-time high and last year didn’t prove as bad as some analysts first feared.

So, just how serious are the risks in 2020 and which risks should investors and business chiefs be talking about?

Wall of worry

At the time of writing, the outbreak of Novel Coronavirus in China was a world health emergency causing increasing concern globally. However, health crisis aside, there are multiple other risks to be wary of which could have a significant impact on the global economy.

George Lagarias, chief economist at Mazars, a participant firm in Praxity Global Alliance, refers to a “wall of worry” in Mazars’ first quarterly of the year. He identifies the biggest issues going forward and highlights those which tend to create “too much anxiety” relative to their probability of impacting the economic future.

The known risks – or “known knowns” we should be talking about are:

  • Trade wars
  • China slowdown
  • Rising valuations
  • Bond prices

We should also be concerned about the “known unknowns” – the issues that investors pay less attention to but merit caution. These are:

  • Currency wars
  • Unravelling of global alliances
  • Europe monetary threats
  • Populism

However, the “unknown knowns” of Brexit, the US elections and fluctuating oil prices, while dominating the news and causing high anxiety in some quarters, may actually not be as damaging as they may appear, George claims.

Serious threats

Explaining the biggest risks to the global economy, the global accounting firm’s chief economist says an escalation of trade wars “can pose serious threats to global growth”, disrupting supply chains and causing long term damage to consumer trust for key brands. Citing President Trump’s ban on trade with Huawei last spring, finance expert says: “This, in fact, is the real risk, the emergence of an ‘us versus them’ mentality, which can severely hamstring marketing and sales efforts across the globe.”

While the China slowdown is well documented, George warns of the dangers of lack of visibility. The problem, he says, is “investors have no real idea what the velocity of the Chinese slowdown is” in terms of clamping down on shadow banking, the impact on the “Belt and Road” initiative and efforts to internationalise the Yuan.

What they do know is two of China’s key suppliers – Germany and Japan – are flirting with recession, and as the slowdown spills into other countries, “it is conceivable that eventually investors might be concerned that future earnings simply do not support current prices, and sell their assets”.

The rising valuation of stocks is also a worry due its impact on appetite to invest. “We believe that while equity valuations do not generally lead to sell-offs, they can however put a dent on the upward trajectory for stocks,” George says.

Vicious cycle

Similarly, bonds are considered by some to be in ‘bubble’ territory but it is the manipulation of bond markets by central banks that should concern investors and business leaders. In Europe, primary bond dealers have all but ceased operations as the central bank “gobbles up most government and corporate bonds”, creating a “vicious and endless cycle of market manipulation” which could see the erosion of trust in central banks.

The other big issues that could impact the global economy in 2020 – currency wars, global alliances and populism – may be “under-priced” by investors but still present a worry, George claims in the Mazars quarterly.

In terms of currency, the key risk is that President Trump’s pressure on the Federal Reserve (Fed), German pressure on the European Central Bank (ECB) and nationalist pressures on the Bank of England (BoE) could turn the central banks into a currency depreciation mechanisms. “This could truly erode trust in central banks and usher a more insidious form of trade wars, currency wars, from which all parties may lose.”

Significant unknown

There are also concerns over the undoing of global alliances such as the WTO, EU, UN and NATO. A major influence is President Trump’s move towards more bilateral relationships. The effects of continued unravelling of these alliances is a “significant unknown” that could have a big impact on politics, trade and wider policy decisions.

In Europe, there is a concern the EMU could eventually fail. European countries which do not control their currency, cannot print money to meet their debts individually. The weaker economies such as Greece, Italy, Spain, Ireland and Portugal run higher risk of bankruptcy, especially if the global economic downturn becomes more pronounced.

Populism is also a worry, because “it plays to inherent and built-in biases”, George says. The Mazars quarterly states: “We believe that as growth slows down, populism will continue to rise, as the promise that people might not have to suffer from a contracting ‘growth pie’ can prove tantalising.” This risks further the “breaking of the global multilateral order”, with grave effects on established international institutions.

Less risk?

While the much talked about Brexit and the US elections might not be quite as damaging as investors think, they could still have a significant impact on economies and international business.

The risk of Brexit may not lie in the threat to London’s financial status but the competitive disadvantage of losing a talented workforce as a result of slower growth, while the big question in the US is whether the elections will result in continued focus on bilateral relationships or a return to globalisation. This could prove more significant than a recent spike in oil prices, which remains below last April’s levels, the Mazars economist states.

So, what does this all mean for the global economy in 2020? Mazars’ quarterly states the trend is for low growth, especially in the West. The global accounting firm predicts this will continue throughout the foreseeable future, pointing to an abundance of liquidity which prevents recessions and events from spiralling into crises.

However, as time passes, there may be a “confluence” of some of the above risks. This could be triggered by “black swan” events – an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.

Things could change quickly but for now at least it looks like the trend for slow growth of the global economy is set to continue. It’s just a question of deciding which risks to take more seriously in a bid to do business across international borders.

This article was written for Praxity Global Alliance, the world’s largest alliance of independent accounting and consulting firms.