As 2018 top risks forecasts roll in, it’s worth a quick look back at the top gray rhinos of 2017 –the most worrisome obvious challenges to the world- and the progress that has been made, or not, in dealing with them. Here’s a rundown of how the 2017 top gray rhino risks have played out.
1) The US Political Environment. Risks have increased over the year as any hopes were quickly dashed that Donald Trump would govern more moderately than he had campaigned. His erratic and bellicose behavior, against the backdrop of an investigation into his campaign’s collusion with Russia in the 2016 elections, has raised further concerns, though you’d be hard placed to tell given the dizzying heights of the stock market. A weak and volatile president with low and falling approval ratings, heading into a mid-term election year, is not exactly soothing given the extent of policy challenges including North Korea, international trade, immigration, and job creation. The deeply unpopular GOP tax reform increases the budget deficit and favors short-term growth over long-term economic health. In disbursing the majority of its benefits to the ultra-rich, the new tax regime will heighten the economic inequality related tensions that led to Trump’s election. Buckle your seatbelts for a rocky year.
2) China’s Economy and Politics. As part of preparations for its 19th Party Congress in October, China signaled its goal of proactively dealing with financial risks by referring to them as gray rhinos. After the five-year National Financial Work Conference in July, the government announced the need to deal with not only black swans but obvious gray rhinos, from shadow banking and unregulated new economic products, to corporate leverage, a real estate bubble, and the high potential for market shocks. Interpreting the reference to gray rhinos as warning of a regulatory crackdown, small-cap and tech stops dropped close to 5 percent in a day after the announcement, though they have since more than recovered. The 19th Party Congress proceeded smoothly, concentrating Chairman Xi Jinping’s power further. Central Bank Governor Zhou Xiaochuan and other officials have repeatedly emphasized the need to head off obvious financial risks. While it is too soon to judge the outcome of the policies they have put in place so far, and success is by no means a foregone conclusion, it is promising that China has identified the biggest risks that need attention and signaled the urgency of handling them.
3) Fractures in the European Union. The May election of centrist Emmanuel Macron as France’s youngest president, and his party’s subsequent win of a parliamentary majority, eased fears of Brexit contagion. With Macron’s approval ratings proving to be volatile, time will tell if France’s choice marked a real turning point or merely the eye of the storm. Meanwhile, the UK’s snap election in June muddied the Brexit waters further, as Theresa May lost her parliamentary majority. Late-fall progress on the Brexit negotiation calmed fears of a “hard Brexit,” but uncertainty remains uncomfortably high. In September, Germany re-elected Angela Merkel, but the confirmation of expectations was jolted by her subsequent failure to form a majority government, and by the nationalist, anti-euro Alternative for Germany (AfD) party’s winning 13 percent of the vote and representation in the Bundestag. Political instability in Germany, especially the rise of the far right, makes it harder for the European Union to wrestle with the reforms it needs to make, including tough challenges related to the euro.
4) Cyber Risk and AI. Big cyber breaches like Equifax and Yahoo, along with increasing reports of ransomware attacks, have raised cyber worries for some, but not all. A recent CA Veracode survey of 1403 business owners in the United States, UK and Germany, fewer than half had heard of many of the biggest cybersecurity breaches. Artificial intelligence and automation continue to advance in leaps and bounds –literally, for some robots that have improved their mobility— but there is a wide range in responses to them. Asian and Western participants responded very differently to a recent survey of AI experts on how soon machines might overtake humans on various tasks. Asian respondents expected that would take 104 years, while Westerners predicted it would be 168 years (Europeans were in the middle at 131 years).
5) Market Volatility. Given all of the political and economic uncertainty, coupled with an aging bull market and vertigo-inducing market highs, volatility has remained astonishingly low. Many investors are sounding warnings but staying in the market as long as the bull keeps running –but keeping an eye out for warning signs, whether market indicators or geopolitical events that could catalyze a big drop. One key signal, the dynamics of the spread between short- and long-term bond yields, has pushed the yield curve to its flattest level in a decade, an indicator that often presages recessions. This has raised eyebrows and prompted debate over whether or not (sigh) this time is different. (Really?)
Check back in mid February for a roundup and analysis of the 2018 top risks forecasts.