What will keep investors and policy makers up at night in 2017?
For the second year in a row, I’ve sorted through lists of predictions and top geo-political and geo-economic “gray rhino” risks: the highly obvious, probable threats that may or may not be getting the attention and responses they need to be averted. More often, the answer is “not.”
With the European Union dropping to third place and the United States taking the top spot, China has risen to second place. Technology –including both cyber attacks and the economic and political fallout of automation and artificial intelligence on jobs- has bumped the Middle East off of the top five list. Market shocks have fallen to fifth.
This list is derived from nearly two dozen “top risks” and predictions lists, as well as reports from analysts. Because these lists come from different angles, I’ve focused on those with geo-political and economic implications. I’ve factored in number of mentions and where each risk is on a list; connections with and impact on other risks; size of the risk; and speed. While no list is perfect, studies show that drawing on a wider, diverse set of inputs comes up with the most accurate assesments.
So, without further ado, here are the Top Global Gray Rhinos of 2017:
1) The United States political environment is the top risk this year, up from third place in 2016. It gets top billing in part because of the global reach of its impact and the sheer number of mentions not just of the broad political situation, but of the potential consequences: regulatory and legislative whiplash, growing populism and anti globalization, big power saber rattling, income and wealth disparity, and authoritarianism, political violence and extremism. The Economist Intelligence Unit –which in 2016 rated a Trump presidency the “top global risk”- downgraded the US from “full democracy” to “flawed democracy” as a result of recent developments. The turmoil at the beginning of the Trump administration bears out these concerns.
2) China’s intertwined economy and politics. The economy is the top risk for the Economist Intelligence Unit, and military issues the second-highest risk for Eurasia Group. The 19th Party Congress this fall brings the risks that always accompany transitions, as President Xi Jinping presides over high-level leadership changes. Reports that China’s foreign currency reserves fell by $320 billion in 2016, and in January for the first time in six years fell to a hair under $3 trillion –of which only $1 trillion is estimated to be liquid. Michael Pettis, one of my favorite China analysts, has long argued that markets underestimate the size of China’s problems, but that the country is still likely to avoid a full blown crisis. But even he is increasingly worried. Analysts identified China as a major risk in 2016, but it dropped off the radar when it seemed that it might muddle through successfully. But this year, China has edged out Europe for the second spot because of the sheer number of mentions and interconnections with other risks –particularly given provocations by the new US administration. The challenges facing Europe, however, are daunting as well.
3) Fractures in the European Union, the top risk of 2016, remain a major risk, slipping to third place only because U.S. and China risks are perceived to have risen even more. With roughly €360 billion in distressed loans (versus €225 billion in bank equity), Italy is facing some hard realities. German taxpayers are not likely happy with the prospects of a bailout in Italy, nor with continuing Greek drama. Recent polls show German Chancellor Angela Merkel losing her re-election bid in September. Deutsche Bank, with intricate, systemically significant connections across the global economy, remains a major risk. French elections, where Marine LePen has pledged to withdraw from the Eurozone and possibly even the whole EU if she wins. While polls suggest that she’d lose in the second round, we know all too well how fickle polls can be. Following the 2016 Brexit vote and Italian referendum, the anti-EU forces have been gaining momentum. Growing political extremism and further terrorist attacks could tip the balance further.
4) Management of technology, including cyber attacks and responses to the impact of automation on jobs, has received attention from both political risk-oriented lists and more operationally oriented. This broad category is tied in to the rise of populism in the United States, fed by fears on both the national security and the job security front. Cyber attacks were mentioned on nearly half of the lists consulted, reinforced by worries over business interruptions. Growing cyber dependency makes economies and governments that much more susceptible to cyber attacks. Though trade and immigration have been the target of populist furor, a number of analysts have rightly pointed out that robots and automation are a much bigger threat to jobs –an issue that has not received the policy attention that it needs.
5) Market volatility has fallen in the number of mentions this year, but that may simply because analysts are looking at the risks above as triggers to market gyrations. Or, more troublingly, it may be because of what one small investor expressed to me: “They keep saying it’s going to collapse and it doesn’t, so I thought I’d get back in.” Analysts listed market concerns ranging from politicized central banks to interest rate volatility and rising inflation, US dollar, and interest rates, to corporate debt. Underfunded pensions are another concern. The Bank for International Settlements has been warning about the risk of a China banking crisis and involving rising global debt levels.
Worries over the direction of the global economy as a whole were relatively low, perhaps because there is typically a lag between market and political shocks and slowing economies.
Other risks that were mentioned but didn’t make it to the top 5 include the Middle East as a whole, with particular concerns over Turkey, Afghanistan and Syria; North Korea, Venezuela, South Africa, India/Pakistan tensions, the Philippines, and India.
Climate change and its consequences received two mentions on this year’s lists, along with related mentions of natural catastrophes and business interruption.
In coming weeks, I’ll be going into more depth on the top five global gray rhinos and what’s being done about them.
You can view many of this year’s predictions and top risks reports here: