The global economy is gradually moving from a weak growth to slowdown. This is going to drop down the prices on risky assets all around the globe, including commodities, stocks and bonds. This what Nouriel Roubini, Chairman of Roubini Global Economics and Professor at New York University thinks on the matter.
He says that everyone seems to be concerned about whether we are back to the 20008 crisis. The answer is “No, we are not”. Still, the latest storm seen in financial markets seems to be the most volatile in history. At the same time, this is the biggest sellout since 2009. This is due to the fact that there are at least 7 major sources of global risks.
Mr. Roubini is convinced that there are at least 7 major sources of global risk at this point while over the past years there used to be one one or another source of such risks at a time – the Eurozone crisis, the market hysteria of the Fed’s plans to start raising interest rate, possible Brexit, China’s hard economic landing and so much more…
First off, it is all about concerns over China's hard landing. The thing is, China is the world’s second biggest economy, which is why it cannot but affect other economies and international stock markets. China keeps on seeing its economy slowing down amid a flight of capital.
Secondly, a lot of emerging markets are facing major challenges in the form of macroeconomic imbalances, budget deficits, growing inflation, devaluing national currencies, and economic slowdowns. Most of those countries have still failed to implement all the necessary structural reforms. In the meantime, devaluing currencies make their dollar debts even more expensive than ever.
Thirdly, the Fed might have mistaken when putting an end to the policy of zero interest rates. Lower inflation (caused by lower oil prices), economic slowdown, tougher financial conditions (due to a stronger dollar, weaker stock markets, and wider credit spreads) are now threatening the U.S. economic growth and inflation expectations.
The forth factor to keep in mind is, multiple geopolitical threats start reaching the boiling point. As usual, the Middle East brings us more and more uncertainty, especially amid the possibility of a long-term cold war between local states – for example, Saudi Arabia and Iran.
Number 5 is all about oil prices, which are going down and affecting many of the stock markets out there, simultaneously driving credit spreads higher, not to mention oil-exporting economies around the globe.
The 6th challenge to consider is crisis in the banking sector. Banks all around the world are seeing their profits going down amid bad debts, unfavorable legislation, risky business models, negative interest rate policies and so on.
And finally, the Eurozone may turn into the epicenter of a major financial hurricane this year. European banks have a lot of problems to solve. At the same time, migration crisis may trigger more challenges, including the disintegration of the Schengen Area and the dismissal of Merkel’s government.
At the same time, Great Britain may quit the European Union. The Brexit referendum is planned for late June 2016. This may provoke the domino effect. For instance, Greece also starts confronting the lenders, which may result in a Grexit. All in all, Europe’s integrity is in jeopardy. The situation in Ukraine is still unstable.
The bottom line is, 7 major problems plus extra ones may seriously affect the world in the future. They make the global economy slow down. Eventually, riskier assets are going to lose value since few investors are going to stay interested in them. While those risk are real, Mr. Roubini says that even if there is a major crisis, those 7 factors may take some time to escalate and trigger a crisis. That’s why he doesn’t expect something like that this year. Well, that remains to be seen…
