‘Sometimes decades pass and nothing happens; then sometimes weeks pass and decades happen.’
This observation of Lenin aptly sums up the past six months. First we had the Arab Spring and rising oil prices, then the Japanese earthquake and the debt ceiling argument in Washington. And all the while the Eurozone debt crisis has been escalating.
This month’s issue of EFIC’s newsletter, World Risk Developments, looks back at that eventful six months and ahead to the next year. ‘We are dialling down our optimism, because of the setbacks the world economy has received, the fact that it is now in a ‘soft patch’, and it could be dealt some further knocks’, says EFIC chief economist Roger Donnelly.
Those further knocks come from three sources, says Donnelly. ‘The Eurozone, the US and Asia.’
‘Not only has the Eurozone crisis spread from Greece and Ireland to Portugal; it has also begun to threaten Italy and Spain.’
‘The EU will probably be able to manage an orderly workout of the problems’, says Donnelly. ‘But the risk remains of a disorderly default that jolts markets and banks and leads to another global credit squeeze.’
‘As for America, it is close to ‘stall speed’ and threatened by a stern financial market reaction if the government ‘runs out of money’. A last-minute lift of the debt ceiling looks likely. But it behoves us all to ponder what happens if Democrats and Republicans remain at loggerheads.’
According to Donnelly, Asia is different from the North Atlantic. ‘Not in danger of stalling, but of overheating.’
‘Central banks have begun to hike interest rates, but there’s the risk they either let inflation get away – or overreact to the inflationary threat and kill growth. And if the North Atlantic were to go into another severe downturn, Asia would probably not be spared, given its export dependence.’
‘Our base case remains that the world economy escapes its soft patch in the second half of 2011', Donnelly concludes. ‘But this will require several things to go right – in the Eurozone, America, Asia, and last but not least the Middle East.’
‘It isn't outlandish to believe that the world will pull these things off. But neither is it unreasonable to worry that the world won't.’