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What could disrupt the global economy’s growth path?

Glen Hodgson
Senior Fellow
This article was originally published in The Globe and Mail on October 25, 2017.

The global economy is performing very well right now. The International Monetary Fund recently upped its world economic outlook and is projecting global growth of 3.6 per cent in 2017, followed by 3.7 per cent in 2018. The consensus among private-sector forecasters follows a similar pattern.

Yet, with every forecast, there should be an assessment of factors that could change the story, positively and particularly negatively. There are plenty of risk factors that could sneak up and spoil the party. Let's start, however, by dismissing two factors that have disrupted global growth in the past: monetary policy and commodity prices.

First, there will not be an aggressive tightening of monetary conditions in major countries or a rise in currencies any time soon. Interest rates have begun to rise modestly in the United States and Canada and a hike is expected next month in Britain – moves that reflect local conditions, and there is little prospect of monetary authorities sharply raising short-term interest rates.

Moreover, central banks in the United States, Britain, European Union and Japan are focusing on steadily reducing the huge stock of liabilities and assets built up through quantitative easing and other direct financial-market interventions – without disturbing the growth recovery.

Second, it is unlikely that soaring commodity prices will disrupt global growth in the near future. Oil prices have partly recovered from their 2014-15 collapse, but West Texas intermediate is having a hard time staying above $50 (U.S.) a barrel. Prices for many other commodities from metals to potash are well below their past highs. Collectively, commodity prices are expected to rise in 2018, but it's hard to find prominent demand or supply factors that would push them up significantly.

The risk factors that do require attention start with uncertainty in global trade.

Trade relationships in North America and Europe (between Britain and the European Union) are being renegotiated; a misstep in these negotiations could severely rock regional economies and undermine growth, both in 2018 and in the years ahead.

American protectionism– such as potentially ending the North American free-trade agreement – would be a threat to the United States itself, to North American growth and to the global economy. The reintroduction of tariffs in North America would raise the cost of imported goods for both consumers and businesses, cause uncertainty for business investment, make exports less competitive and disrupt North American supply chains.

All of this could take a bite out of the global outlook.

Next, the world – governments, businesses in emerging markets and households (including those in Canada) – has built up a lot of debt. The Greek debt crisis has been kicked down the road repeatedly, but it has not been solved and will flare up again. Countries such as Japan, Italy and Spain have uncomfortably high levels of public debt. Low interest rates have disguised the cost of carrying debt, but a material increase in interest rates or a stumble in overall economic growth would expose debtors to greater risk.

Rising debt levels can be linked in part to rising asset prices, but policy makers may be slipping into complacent financial oversight and management once again. The cover of The Economist recently proclaimed that there is a global bull market in everything – stocks, bonds, real property, cryptocurrencies. A sharp correction in asset prices could ripple through markets and would hurt investor confidence. Yet, the Trump administration is erroneously undoing many of the risk controls put in place after the 2008 financial crisis. This combination of hot assets and weakened oversight could end in tears for many, and an asset-price correction could impair global growth.

There is also an array of heightened geopolitical risks, with North Korea at the top of the list as a destabilizing force. Civil wars in Syria and Yemen, military tensions between Russia and Ukraine, and the slow implosion of Venezuela are other high-profile trouble spots. A further rupture could impair investor and consumer confidence and have ripple effects on global performance.

Canada is tracking, but not mirroring, the global growth trend. After a stellar 2017, with economic growth as good as it gets, the Conference Board of Canada expects Canadian growth to slow to 2 per cent in 2018. And Canada is being confronted by some of the same global risk factors: NAFTA negotiations are reaching a critical stage, millions of consumers are highly indebted and some property markets remain heated. While the global economy is expected to keep on pace and even accelerate modestly in 2018, any of these threats could disrupt the existing optimism.

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