After the global economy experienced a small dip in growth in 2016, the world’s real gross domestic product (GDP) has been growing slightly more strongly since 2017. At present, most projections assume that the global economy could continue to grow by around four percent in the coming years. However, there are also numerous risks that endanger this growth process.
Business as Usual
In the years before the Lehman collapse, the world’s real GDP grew by around five percent annually (see Figure 1). After the economic slump in 2008/2009 and the recovery in 2010, growth in the years between 2012 and 2015 was around 3.5 percent each. Only 3.2 percent growth was achieved in 2016. For the next few years, the International Monetary Fund expects somewhat stronger growth of around 3.8 percent. The highest growth rates are recorded in the emerging and developing countries.
However, these projections assume that there are no serious economic distortions. However, this is by no means guaranteed. There are currently numerous risks whose outbreak would lead to a decline in economic development. I currently see seven risks to global economic development in the coming years.
#1: Global Excess Liquidity
Since the outbreak of the Lehmann bankruptcy, the most important central banks have massively increased their money supply. This money has largely flowed into the asset markets. Speculative bubbles are forming there. The bursting of such a bubble would result in a worldwide slump in economic development – just as after the bursting of the real estate bubble and the associated Lehmann bankruptcy.
#2: Growing Debt
The expansion of the global money supply is accompanied by an increase in the debt of states, companies and private households. This increase comes as no surprise: the aim of an expansionary monetary policy is for economic actors to make credit-financed purchases of goods and thus stimulate the economy. But this creates credit bubbles. Non-performing loans have more or less the same real economic consequences as a burst bubble.
#3: Increasing Protectionism
Since the outbreak of the Lehmann bankruptcy, we have seen an increase in protectionist measures worldwide. This is mainly an increase in non-tariff barriers to trade. Since March of this year at the latest, the protectionist measures taken by the USA have further intensified economic foreclosure. Disintegration processes such as Brexit also make the cross-border exchange of goods and services more difficult.
#4: Escalation of Geopolitical Conflicts
There are currently numerous geopolitical conflicts: North Korea, Afghanistan, U.S.-Saudi-Iran rivalry, Syria, Ukraine, Venezuela – the list can be extended at will. Even the fear that one of these conflicts could escalate is unsettling investors. However, investments are the prerequisite for economic growth. Should geopolitical conflict develop into a cross-border military conflict, this would result in an economic slump in all countries involved. Added to this would be negative effects on the entire global economy.
#5: Increase in Social Instabilities
Economic globalization is increasing GDP in all participating countries. At the same time, however, it is also intensifying the shortages in all national economies. This has an impact on income distribution. Globalisation therefore has negative income effects for certain people and regions in the countries involved. This can lead to growing social tensions that have a negative impact on economic development. Social tensions can also lead to increasing populism. And this populism in turn promotes protectionism with the negative effects on global economic development already described.
#6: Rising Interest Rates in the U.S.
Unlike in Europe, the U.S. Federal Reserve has already raised its interest rates slightly several times in recent years. Rising interest rates in the U.S. make it attractive for international investors to invest their money in the U.S.. For other countries this means a capital deduction. Rising interest rates make it difficult for highly indebted developing countries in particular to pay interest on their loans. In the event of a capital withdrawal and rising interest rates, there is a risk of national bankruptcy. High interest rates are also a problem for the southern European countries with a high level of debt.
#7: Technological Disruptions
In addition to economic globalization, technological progress is also changing the scarcities in an economy. At present, technological progress primarily means an increasing capital intensity of production. In highly developed economies, the demand for labour is therefore declining. Low-skilled workers in particular can then be affected by unemployment and loss of income. This in turn leads to social tensions with the economic effects already mentioned.
As long as none of the risks outlined above materializes, we can expect global growth of around four percent. Should individual dangers for the global economy increase – e.g. the outbreak of a global trade war or the bursting of a speculative bubble – this would lead to an economic slump with an increase in unemployment. The possibilities for economic policy action are then limited:
- Monetary policy is hardly effective any more because interest rates in the major economies are already at zero.
- Fiscal policy is also only partially operational. The high national debt, which can be found in many countries, makes government economic stimulus programs more difficult in the event of an economic slump.
While there is no certainty that these risks will escalate, we should not rely on sustained economic growth.