Risks to the global economy continue to be on the downside and include severely weaker global development and an unexpected change to projections regarding the U.S. Federal Reserve’s interest rate route.
The possibility for policy mistakes is significant in China, particularly due to the emergence of a new property market bubble. Hence, there is a chance of an economic downfall of China.
The decision makers in China are keen to tackle the huge amount of non-performing loans. However, the approach would not yield results in the short-term and there are accompanying downside risks.
A sharper-than-anticipated slowdown in the second-largest global economy could send shock waves around the globe.
Experts have termed such an event as a “black swan” – metaphor for unexpected events that extremely impact the global development.
Increasing uncertainties regarding Europe’s political future are also a risk to the international economy. The forthcoming referendum in the UK on exiting the European Union has brought the regional politics into the limelight.
Any political ambiguity in Europe could increase the drag from policy uncertainty on economic development. It would have a negative impact on the movement of global trade.
The busy political schedule that is lined up for the forthcoming quarters may increase the risk of an event resulting in an unexpected outcome.
Another possible negative event for the global economy could be a disorderly re-pricing of market outlooks of when would the Fed raise the rates once more.
Markets are anticipating a Fed rate hike sometime this year. If the Fed delivers a bullish message, there is a risk of the re-pricing becoming disorderly. On the other hand, if the Fed delivers a bearish message, the bond markets could be discouraged due to higher inflation interpretations and an even tighter labour market.
Global policy makers must constantly identify any “black swan” event and initiate measures to counter them. If left uncontrolled, they could have an adverse effect on global growth and the fight against poverty.