Thursday, January 15, 2009

Global Risks 2009: Hard Landing Predicted For China (World Economic Forum)

The boffins of Davos have done it again. This year's Global Risk Report, prepared by the World Economic Forum is on the street and a more grim story I have rarely read.

Consider these findings (Bold mine):

  • "The decline in export demand has led to a substantial reduction in China’s overall economic growth, increasing considerably the risk of a hard landing that would stress the financial system and could generate social tensions within China and beyond as other economies face similar declines."

  • "Although global equity markets have declined on average by more than 50% in a very short time, the vicious circle between falling asset values, write-downs and attendant pressure on the capital position of financial institutions and continued deleveraging appears to be unbroken. This vicious circle is now affecting manufacturing, services and households around the world and the credit crunch has generated a substantial weakening of economic activity and growing credit losses."

  • "The US, United Kingdom, France, Italy, Spain and Australia are all already running high deficits. Massive government spending in support of financial institutions and growth are threatening to worsen fiscal positions that are already precarious in many countries. The convergence of this decline with rising health and pension costs in industrialized economies due to demographic trends will place further fiscal pressure on governments."

  • "...uncertainty in the financial sector, falling asset prices, poor credit conditions, weak demand and rising unemployment could create a deflationary spiral. However, the short-term risk of deflation must be seen in the context of a long-term inflation risk caused by the large monetary stimulus in pursuit of financial and economic stability and the risk posed by the growing public debt. Economic history is littered with periods during which governments reduced their debt burden through inflation."
These guys were spot on last year when they indicated that the greatest risk for 2008 (in terms of risk and dollars lost) was asset price collapse. Let's hope they are less accurate this year...

  • Note: With respect to China at least, the DNI's threat assessment last year mentioned a similar threat (in much less stark terms). I noted at the time that all of projects we had done here at Mercyhurst regarding China saw the wheels starting to come off the Chinese juggernaut sometime after the 2008 Olympics. The dynamic pretty much went like this in every case: Something -- environmental degradation, energy prices, corruption, downturn in the business cycle -- threatens the social contract between the Chinese Communist Party and the people of China. This social contract basically says "We will allow the CCP to rule as long as things are getting better for me and mine." Once they start to get worse, the regime change clause of the Mandate of Heaven kicks in...

The report this year is organized around the same types of risks as last year's report. There is a briefing chart supplement this year with some very interesting graphics in it. The image below, for example, shows the inter-related nature of the risks (click on it to get the full briefing report).


Also useful is the YouTube video interview with the editor of the report:


The most disappointing thing about the report this year is that the WEF decided not to include the raw numbers as they did with last years report. This makes it much more difficult to provide an overall risk assessment that takes into consideration both potential costs (dollars and lives). They had two options, I guess, after last year's report: Do the combined risk analysis themselves or make it much more difficult for others to do so. It is a shame they decided on the less transparent course of action.

1 comment:

William said...

Thanks for this! I will use this as a discussion piece in my class sometime in the next few weeks.