Global Economy : Outlook and Risks

Denis LyonsGlobal Economy : Outlook and Risks by Denis Lyons 

Given the recent furore about Greek debt, it is interesting to note that that from a global perspective it can also be seen as an epiphenomenon; a storm in a teacup. According to the World Economic Outlook published by the IMF, Greek GDP represents a mere 2% of the Eurozone total and 0.5% of global GDP. Olivier Blanchard , the outgoing Chief Economist of the IMF states in the report that even if the situation in Greece were to deteriorate further, the rest of the world would still survive quite well. This rather surprising statement by one of the country's main creditors raises at least two questions.

1. Why all the fuss about Greek debt?

2. What are the real threats to the global economy?

The answer to the first question is as much (if not more) about politics as it is about economics and is beyond present scope. The answer to the second can be more readily gleaned from the report.

The first preoccupation is world economic growth. More than half of this is accounted for by the US economy. US GDP is currently running at 2.5% -0.6% less than expected. Nevertheless, the “fundamentals” of the US economy are said to be sound. Europe and Japan are also doing better than before; so the recovery is now confirmed, at least in developed economies. In China, growth of 6.8% is envisaged for this year with slightly less (6.3%) forecast for 2016. The recently pricked “bubble” on the Chinese stock market, like Greek debt, is classed as a storm in a teacup by the report.

For BRIC countries the outlook is a mixed bag, with recessions in Russia (-3.4% GDP) and Brazil (-1.5%) There is also a growing lack of confidence in political decision-making in these countries as well as on-going concerns about corruption and political cronyism. This has had the effect of dampening demand and turning away foreign investment. In the other BRIC countries, the outlook is more stable with steady growth and a favourable investment climate.

Although the risk of deflation has diminished globally, the risk of financial turbulence due to sovereign over-indebtedness remains. Added to this is the risk of an American interest rate rise which could spell the end of an era of cheap credit. These factors could put a brake on growth and the current rather shaky recovery.

Weak growth and growing social inequality have wide-ranging implications on the political, social and financial fronts. Even the self-styled “reforms “ beloved of the IMF and ECB cannot deal with such issues or reverse this trend, especially in the short term. The tendency for crises to bubble up and to then be blown up by the Press remains. There is also the increasing destabilisation of countries in the Middle East by war and sectarian/religious strife. The way these conflicts spread across borders and suck in neighbouring countries is an additional threat: recent events in Turkey being a case in point.

Such issues may seem remote from our daily concerns, but the current debacle regarding migrants at Calais shows how global issues can quickly turn local in today's world.