A report by The Economist Intelligence Unit Top five risks to the global economy in 2020The world leader in global business intelligence The Economist Intelligence Unit (The EIU) is the research and analysis division of The Economist Group, the sister company to The Economist newspaper. Created in 1946, we have over 70 years experience in helping businesses, financial firms and governments to understand how the world is changing and how that creates opportunities to be seized and risks to be managed. Given that many of the issues facing the world have an international (if not global) dimension, The EIU is ideally positioned to be commentator, interpreter and forecaster on the phenomenon of globalisation as it gathers pace and impact. EIU subscription services The worlds leading organisations rely on our subscription services for data, analysis and forecasts to keep them informed about what is happening around the world. 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Through a distinctive blend of interactive conferences, specially designed events, C-suite discussions, member briefings, and high-calibre research, The Economist Corporate Network delivers a range of macro (global, regional, national, and territorial) as well as industry-focused analysis on prevailing conditions and forecast trends.TOP FIVE RISKS TO THE GLOBAL ECONOMY IN 2020 © The Economist Intelligence Unit Limited 2020 1 1. US-Iran conflict leads to a spike in global oil prices 3 2. A trade war breaks out between the US and the EU 4 3. Coronavirus takes a lasting toll on the global economy 5 4. Debt burdens cause a recession across emerging markets 6 5. Hong Kong protests cause an exodus from Asias biggest financial centre 7 ContentsTOP FIVE RISKS TO THE GLOBAL ECONOMY IN 2020 © The Economist Intelligence Unit Limited 2020 2 T he year 2019 was a difficult one for the global economy, as geopolitical uncertainty and a slowing Chinese economy combined to trigger a global manufacturing downturn. With some luck and monetary stimulus, The Economist Intelligence Unit previously expected global growth to be marginally faster in 2020. However, renewed geopolitical uncertainty (tensions between the US and Iran flared up again in January), coupled with the emergence of a novel coronavirus in China, will limit any pick-up in business confidence and investment, and the balance of risks to the outlook appears firmly tilted to the downside. Meanwhile, the social unrest seen across the world in 2019 looks set to continue in 2020, challenging both policymakers and business models. Global growth is forecast to be 2.9% in 2020, close to decade lows. We expect economic growth in the developed world to slow in 2020, driven by a moderation in US growth. Meanwhile, the emergence of a novel coronavirus in China will dampen Asias growth perspectives. In the rest of the emerging world, we expect only a modest recovery from a torrid 2019, including in Latin America, the Middle East and Sub-Saharan Africa. This growth outlook is supported by continued ultra-loose monetary policy among the worlds major central banks. This will cushion demand in developed markets and limit the financial pressures that some heavily indebted emerging-market economies might otherwise face. However, ultra-loose monetary policy also represents a risk, as it may trigger new debt crises in emerging markets. Potential hotspots include Brazil, which has cleared the major hurdle of pension reform; Turkey, where the recent stabilisation in the currency is supporting a stabilisation in the wider economy; and South Africa, where energy shortages are widespread. Most importantly, the trade truce between the US and China remains fragile, and a flare-up in tensions between the worlds two economic superpowers cannot be excluded. Against this backdrop, policymakers and businesses should prepare for further volatility in 2020. In the latest edition of this report, we offer a snapshot of our risk-quantification abilities by identifying and assessing the top five risks to the global political and economic order. Each of the risks is outlined and rated in terms of its likelihood on the global economy. We also provide operational risk analysis on a country-by-country basis for 180 countries through our Risk Briefing, and detailed credit risk assessments on 131 countries via our Country Risk Service. Together, these products enable our clients to anticipate and plan for the main threats to their organisations, supply chains and sovereign creditors. We offer robust risk modelling, scenario analysis and daily events scanning for the threats and opportunities that abound in todays global economy.TOP FIVE RISKS TO THE GLOBAL ECONOMY IN 2020 © The Economist Intelligence Unit Limited 2020 3 T he USs assassination on January 3rd of Qassem Suleimani, the veteran commander of the elite Quds Force of Irans Islamic Revolutionary Guards Corps, marked a dramatic and dangerous escalation of the tensions between the US and Iran. Both the US government and its Gulf allies want to avoid a conflict that could trigger a destabilising spike in oil prices, and Iran does not have the military or financial means to wage a war against the US. However, tensions between the two sides are very high, complicating communication. Furthermore, there is a high risk that Iran will launch targeted attacks against US interests in the Middle East in the coming months; such attacks are likely to take place in countries where the US and Iran support different sides or factions, such as Yemen, Lebanon, Syria and Iraq. Cyber-attacks (from both sides) are also a distinct possibility. The US or one of its allies, such as Israel, could cripple Iranian nuclear facilities or institutions through the use of computer viruses. Iran also has the capacity to wage cyber- attacks against US companies; the financial and energy sectors appear the most sensitive, given the importance that companies in these fields have to the US economy. As a result, the risk of an unintended slide into an escalating military conflict cannot be ruled out. The Economist Intelligence Unit estimates that there is a 25% chance that the US and Iran will be dragged into a direct, conventional war, which would have devastating consequences for the global economy. In particular, in this scenario there is a distinct possibility that the Strait of Hormuz (through which about 20% of global oil supplies transit) could be closed for an extended period of time. Although the US and Russia have the capacity to ramp up oil production to avoid a temporary supply shock, a prolonged disruption to oil supplies could cause oil prices to rise to as much as US$90/barrel, fuelling a rise in global inflation and dampening consumer and business sentiment. 1. US-Iran conflict leads to a spike in global oil prices Likelihood: 25% Source: EIA, The Economist Intelligence Unit. -200 -100 0 100 200 300 400 -200 -100 0 100 200 300 Econ Sans 8pt light 400 Econ Sans 8pt light Econ Sans 8pt light Econ Sans 8pt light Econ Sans 8pt light Dire straits Main oil shipping routes and chokepoints Transport volumes, million barrels per day, 2016 Strait of Malacca 16.0 Strait of Hormuz 19.0 Bab El-Mandeb 4.8 Cape of Good Hope 5.8 Panama Canal <1 Suez Canal 5.5 Turkish Straits 2.4 Danish Straits 3.2TOP FIVE RISKS TO THE GLOBAL ECONOMY IN 2020 © The Economist Intelligence Unit Limited 2020 4 E U-US trade relations have been under strain since mid-2018, when the US government launched a Section 232 investigation into the national security implications of imports of foreign-made cars and car parts and threatened to raise tariffs on European auto imports by 25%. Although the US appears to have withdrawn the threat, tensions persist on a number of fronts. In October the US imposed tariffs on a range of EU goods, following investigations into the EUs provision of subsidies to Airbus. The US has also threatened additional tariffs on France over its digital-services tax. Finally, the EUs new Green Deal will also prove to be a contentious topic for US-EU trade relations. EU-US tensions will rise further this year, as the recent completion of a first-phase US-China trade deal causes the USs attention to shift back to the EUs trade surplus with the US, and the EUs position becomes more assertive with a new Commission in place. As a result, a further escalation in tariffs involving the US and EU auto industries cannot be ruled out. In addition, progress on trade talks will remain frustratingly slow, with the EU particularly unlikely to give significant ground on agriculture. The temptation to raise the stakes will therefore be high. Finally, although a truce seems to have been agreed between France and the US, US retaliatory tariffs against Frances digital-services tax (which mainly targets big US tech companies) are a distinct possibility. Any of these disputes could spark a damaging trade war between the US and the EU. If the US does impose tariffs on EU auto imports, the impact on the EU economy, the worlds second largest, would be severe: the auto industry accounts for about 6% of total jobs in the EU, and beyond the immediate impact from lower exports to the US and third countries, there would be a sharp hit to business confidence in core EU countries. The EU would be forced to retaliate, raising the risk of a global trade war as third countries are forced to choose sides. The impact on the global economy would also be severe, as global growth would slow, inflation would rise, and consumer and business sentiment would drop. 2. A trade war breaks out between the US and the EU Likelihood: 25% Source: International Monetary Fund, The Economist Intelligence Unit. US bilateral trade decits, 2018 (US$ bn) 0 100 200 300 400 500 0 100 200 300 400 500 Denmark Sweden Venezuela Israel Saudi Arabia Iraq Indonesia Russia Taiwan South Korea Switzerland Thailand Canada India Malaysia Vietnam Japan Mexico Euro Area ChinaTOP FIVE RISKS TO THE GLOBAL ECONOMY IN 2020 © The Economist Intelligence Unit Limited 2020 5 T he 2019 novel coronavirus epidemic that broke out in Wuhan, the capital of Chinas Hubei province, in December 2019 has so far claimed around 2,000 lives and spread across the globe. After an initially slow response, the Chinese authorities have placed Hubei province on lock-down, significantly restricting a region that is crucially important to national and international supply chains. Economic activity in other regions, including Beijing and Shanghai, has also been disrupted by quarantine measures and reduced domestic demand for goods and services. In addition, travel restrictions have had a significant impact on the consumption of travel and tourism services within China and abroad. The global economic impact of the coronavirus outbreak is set to be more profound than that of severe acute respiratory syndrome (SARS), a similar virus that spread from China in 2003, owing to the much larger role that China plays in the global economy today. However, much depends on the duration of the disruption. Our baseline scenario, based on a range of assessments by medical professionals, is that the public health emergency within China will be under control by end-March. At this point the government will lift quarantine measures and economic activity will normalise. We assume that the Chinese government will also implement strong fiscal and monetary stimulus to engineer a recovery in economic expansion, resulting in a rebound in growth in the second half of the year, both in China and worldwide. We assess a 20% probability that the virus will not be contained in China until mid-2020, and a 5% chance that it will remain uncontained beyond 2020. In the latter worst-case scenario, the economic impact would be much deeper and more persistent. Disruption of international trade would become entrenched as supply chains are diverted from China, with some countries possibly placing heavy restrictions on bilateral trade. US-China trade tensions would be more likely to re-escalate, particularly if China proves unwilling or unable to deliver the import commitments agreed under the recent first-phase limited trade deal. A growing number of international exporters would experience financial distress, as a persistent shortfall in Chinese demand depresses commodity prices and export revenues. An ongoing public health crisis would also be a threat to political and financial stability within China itself. If the governments perceived legitimacy and reputation for competence came under serious threat, it would be likely to respond with enhanced social control measures. At the same time, if the governments use of loose monetary and fiscal policies to stimulate the economy is prolonged into 2021 and beyond, it would renew concerns about Chinas large private-debt stock and long-term financial stability. T aking into account the direct impact of weaker demand in China, as well as potential economic disruption in other countries should