What will keep investors and policy makers up at night in 2018?
For the third 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 nobody should say they never saw coming –yet are not always getting the attention that will resolve them.
These forecasts come from the financial and business sectors as well as from political risk and policy groups, which all have distinct priorities and perspectives. Harmonizing them is part art, part science, as some bill themselves as top risks, while others aim at making broader predictions. Some lists are ordered, while others are not. Some are very specific, mentioning particular countries or sectors, while others draw broader pictures. But viewed together as a while, a broad picture emerges of what professional worriers (and I mean this in the very best sense) are keeping an eye on.
While the top risks of 2016 and 2017 were remarkably similar to each other, the gameboard this year has been re-arranged considerably. As the first quarter comes to a close -and throughout the year- it’s important to keep these in mind instead of forgetting them as the beginning of the year fades into the rear view window.
So, without further ado, here are the top gray rhino risks of 2018:
1) Monetary Policy Errors. Far and above the greatest concern was the realization of the side effects of a decade of easy money, and the fact that global central banks are treading into unknown territory as they consider how to normalize money supplies.
Analysts are noting signs of inflationary pressures in some countries even though wages in the West have been largely flat –especially compared to the ascent of financial markets. Asset bubbles are another form of inflation that is all too rarely called out for what it is. (Many of the forecasts on which this analysis is based were released before the recent financial market connections, but remain top risks.)
The timing of unwinding of quantitative easing is worrisome, coming after years of steady –if slower than usual post-recession- growth. At this time in the economic cycle, central banks normally would be looking ahead to loosening monetary policy, but with rates at historical lows, they have little room to do so.
This set of inter-related challenges heightens the risk of errors, particularly as economic policy makers try to let some air out of over-heated markets while trying to keep economic growth –and social stability- steady. China, of course, has been particularly attentive to these challenges, with senior economic officials identifying financial risk management as a major “gray rhino” for the country.
2) Geopolitical Risks. This grab bag of problems includes Europe’s struggle between unity and fractures, the US retreat from rules-based world order leadership, great power realignment, the rise of populism and trade protectionism, and global uncertainty about China’s rise and relationship with Russia and the stance of both toward the United States.
“This year we are looking at the highest economic growth in a decade, but a geopolitical outlook characterized by uncertainty and confusion. Assertive leaders and populist imperatives are combining with an appetite for military action in multiple arenas.” Control Risk wrote in its 2018 RiskMap.
The political risk consultancy Eurasia Group’s top risk, China’s global leadership, is as much a comment on the United States as a global risk in terms of the legitimacy of government in the eyes of its citizens. Eurasia Group named as its second highest concern, “accidents” –the possibility of political miscalculations with outsize consequences (as in the next gray rhino in this list, North Korea, which earned enough mentions high on lists that it earned its very own ranking.”
Any change represents risk, of course. What is particularly interesting about the ongoing geopolitical realignment is the wide divergence in what different countries see as the biggest risk among the United States, China, and Russia, as Control Risks’ Jonathan Wood demonstrates. Out of 38 countries surveyed, fully 20 –more than half- saw the US as the country posing the greatest global risk, with 9 citing Russia and 9 citing China.
3) North Korea. Though technically part of “geopolitical risks,” North Korea got enough mentions on its own to merit extra attention. The Council on Foreign Relations Preventive Priorities survey, in its tenth year, is more narrowly focused on traditional security issues. Its Top Tier Risks include conflicts in North Korea, between Russia and NATO, a US cyberattack, Iran, South China Sea, and a US terrorist attack. (Most of these predictions were released before the recently announced upcoming meeting between Donald Trump and Kim Jong Un.)
4) Impact of new technologies: skills, economic disruption. Talent shortages and skills concerns new on this year’s list, particularly on Asian CEOs cited in PWC’s CEO Survey, where Western CEOs were much more concerned with geopolitical risks and populism.
5) Extreme weather/climate change. This was on the top of the risks judged to be most likely by survey respondents in the World Economic Forum’s 2018 Global Risk Report (to which I am proud to have contributed a short article on risk and cognitive biases).
Not making it into the top five, but still significant, were the following.
The sixth, seventh, and eighth highest risks-6) Market overvaluation and asset bubbles popping; 7) Trade protectionism; and 8) Iran all earned multiple mentions. They might have been higher in the list except for the fact that they fall into the top two categories: monetary policy and geopolitical risks- but are important enough that they deserve call-outs of their own.
Risk 9) Cyber attacks made an appearance on our 2017 gray rhino list as part of a broad set of risks related to technological change. The number of new mentions of skills concerns was the most notable technology risk this year, but cyber risks merit additional attention. Allianz notes that 54% of those surveyed say that cyber vulnerabilities are the least appreciated of risks on their list. Given the number of articles I’ve read about the increasing number and severity of attacks (Experian, anyone?) contrasted with the lack of a corresponding rise in concern, I’d say this is spot-on. Cyber security also merits attention not just as a corporate issue, but also as a national security issue, when hacks involve government and/or key infrastructure.
Finally, risk 10) Natural catastrophes, like many of the others that made the top ten but missed the top five, also overlaps a top-five risk: extreme weather and climate change.
What’s not on this year’s top gray rhinos list?
Syria and ISIS have fallen considerably among concerns, as have –not surprisingly- worries about mass migration. Last year’s election results in the UK and France eased fears of a European Union breakup, though recent electoral success of nationalist populists in Germany and Italy have raised red flags.
The high rankings of the past two years for US political risk have morphed into the more specific issues of trade protectionism and the geo-political impact of the withdrawal of US global leadership.
Adding a welcome perspective, PWC also notes what’s of surprisingly little concern to CEOs: “Comparatively few CEOs highlight ‘potential ethical scandals’ as a threat – despite the growing number of firms that have suffered reputational damage in the past year because of ethical lapses.”
Also, economic inequality does not make a direct appearance, though it lurks behind the rise of populism and nationalism, as well as within the debate over monetary policy. Quantitative easing has fed record market gains, but fell short in hopes of greater stimulation of the real economy and job creation that could reduce inequality and ease social pressures in the West.
About the annual Top Gray Rhinos list: Each year, Gray Rhino & Company compiles this “meta” list combining the flurry of forecasts, outlooks, and top risk lists that come out from December through February each year. The lists include perspectives from business, political risk, policy, and financial markets perspectives. Using a combination of art and science, we identify trends across these sectors and summarize our conclusions in our own list of “gray rhinos”: obvious, probable threats that typically (but not inevitably) don’t get their due until it’s too late.