Beware of ‘black swans’ in the world economy in 2018, analysts warn

While the world economy has seen a broad-based recovery in the past year, Chinese observers are wary that some “black swan” events could dampen growth prospects in 2018.

Wednesday, January 03, 2018

While the world economy has seen a broad-based recovery in the past year, Chinese observers are wary that some "black swan” events could dampen growth prospects in 2018.

Unique, eye-catching, and hard to find, a black swan is  a metaphor to describe rare events that could cause catastrophic ramifications.

"One of the reasons behind economic strength last year was that we hardly saw any black swans,” said Zhang Ming, a researcher with the Chinese Academy of Social Sciences (CASS).

A report by the Institute of World Economics and Politics under the CASS predicted that the global economy would expand 3.5 per cent in 2018 on purchasing power parity terms.

The rate is lower than previous estimates by international organizations including the International Monetary Fund (IMF), which forecasted in its World Economic Outlook in October that the global economy would grow by 3.7 percent in 2018.

"The lower prediction reflected our concerns over issues, including asset price bubbles, high debt levels and geopolitical conflicts,” said Yao Zhizhong, another researcher with CASS.

According to Zhang, there are at least six black swans that observers should keep an eye on to cushion against their impact.

"The fact that risks did not happen does not mean that they do not exist,” Zhang said.

One of the major uncertainties comes from the political realm. The long-simmering rivalry between global and regional powers in the Middle East could become even more complicated, adding pressure to fluctuations in global crude oil prices.

Elections in Italy could also lead to black swan events such as the country leaving the Eurozone or defaulting on its treasury bonds, derailing recovery in Europe, according to Zhang.

While anti-globalisation sentiment did not deter major economies from benefiting from trade in 2017, any change in the trade policy stance of the Trump administration could affect global growth.

The U.S. economy has maintained mild inflation recently, but a sudden rise could speed up rates hikes and balance sheet reduction by the Federal Reserve.

Such incidents, though unlikely, could slow economic growth in the United States and have widespread spill-over effects.

Another outlier would put an end to the nine-year-long bull market in the United States. The price-earning ratio of the U.S. stock market is reaching historic highs, and some analysts worry that a downturn in the market could be sharp and long-lasting.

"Once the U.S. stock market takes a downturn, it could have a negative impact on asset prices in other countries, and curb consumer spending in the United States, which was the most important driver for its recent recovery,” Zhang said.

Such black swans could also have interrelated effects, causing other rare events to happen, Zhang said.

Faster-than-expected rates hikes in the United States, for example, would lead to a stronger U.S. dollar that could possibly result in capital outflows and currency depreciation in some emerging economies, which  enjoyed short-term capital inflows in 2017.

Other uncertainties, such as geopolitical and trade conflicts, could increase the size of such capital outflows, and even trigger balance of payments crises in some emerging economies, according to Zhang.

"If we could pay high attention to these potential risks and take measures to guard against them in advance, the impacts of black swans may not be as huge,” Zhang said.