The first six months of 2023 proved the doomsayers wrong, with many global share markets achieving double digit returns. But if there is one thing to be certain of, it is that it pays to be humble about markets: complacency and arrogance leads to failure. Only the paranoid survive. So what are the risks in global markets that we should be concerned about at present?
Source: Oxford Economic
Oxford Economics is a highly regarded research group, employing more than 300 economists and analysts. Their latest findings have led them to upgrade their world GDP growth forecasts for 2023 to 2.0%, and in the outer years to 2.2% in 2024 and 2.9% in 2025. Given stronger growth and lingering concerns about sustained high inflation, they expect policy rates to remain higher for longer. This is likely to temper growth in 2024 and beyond, leading to an extended period of unusually low world growth.
Their latest Global Risk Survey (see chart above) shows that respondents to their survey saw greatest risk in “A marked further tightening in credit supply” (30%), followed by “Inflation expectations remain elevated” (24%), “Geopolitical tensions” (21%), and “Full-blown financial crisis” at 18%.
The greatest risk seen in the survey is tighter credit conditions following the aggressive central bank tightenings over the last year. Tight credit conditions lead to stress in the banking sector, and will have spillover effects upon the real economy. Banking stress remains a key uncertainty, and if problems intensify, it could result in a weaker path for the global economy. Higher rates for longer cause over-leveraged companies and households into failure and bankruptcy, and possibly cause a recession. However, because central banks have raised rates so aggressively, they will have ample opportunity to lower rates if required in 2024 or 2025. Indeed, tight credit conditions are self-correcting in the sense that weaker growth results in reduced inflationary pressures and potentially a faster pace of monetary policy easing.
Here is a useful summary of Oxford Economics’ key themes and assumptions:
Source: Oxford Economics
The good news is that a “full-blown financial crisis” is viewed as a low probability risk, i.e. below 20% according to the survey. Indeed, it’s likely that a full-blown financial crisis should always be on the table as a possibility, even if it is fairly low on the list of things to worry about.
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