Download Global Economic Risks and Geoeconomics

Global Economic Risks and Geoeconomics:
Applications to Europe and its Businesses
Prof. Ángel Pascual-Ramsay
Director, Global Risks, ESADEgeo
Department of Strategy and General Management, ESADE Business School
Non-Resident Senior Fellow, The Brookings Institution
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Why Do Economies Grow Rapidly?
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Lesson Road Map
• New VUCA (volatility, uncertainty, complexity, and ambiguity)
context
• 12 Key global economic and geoeconomic trends
• Rodrik’s Trilemma
• Global economic and geoeconomic risks
• Recommendations for EU businesses
• Writing exercise on today’s lesson
• Conclusion
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New VUCA Context
Volatility
Uncertainty
Complexity
Ambiguity
Source: Bennett and Lemoine
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Context: Global Economic Landscape
• Global growth
– 2015 (projected): 3.1% (IMF WEO Oct 2015)
– 2000-2010: 3.7%
• Now, mainly up to the BRICS
• Deteriorating outlook for emerging
economies
• Improved outlook for developed economies
– Benefiting from low oil prices
– But, still vulnerable (quantitative easing, low
quality employment, etc.)
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12 Key Global Economic and Geoeconomic Trends
1. Economic axis shifting back to the
Pacific
7. Quantitative easing and possible
risk of price effects
2. Slowdown in emerging economies
8. World financial system remains
vulnerable
3. Increasing role of emerging and
frontier markets
9. On-going euro crisis
4. Secular stagnation
10. Structural unemployment
5. Deflation
11. Rise of state capitalism
6. Drop in oil prices
12. Retrenching globalization
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1. Economic axis shifting back to the Pacific
The world economy’s center of gravity is shifting back to the
Pacific at the fastest rate in history (“Return to 1820”)
World's largest economy
(PPP)
1000: India
1500: China
1600: China
1700: India
1820: China
1870: China
1913: US
2003: US
2014: China
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2. Slowdown in emerging economies (1/2)
It’s all about China…
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2. Slowdown in emerging economies (2/2)
• Decreasing growth
…and China is slowing down
– 7% first three months of 2015
• Transition to a new economic model
– Consumption vs. investment
– Services vs. manufacturing
– Domestic demand vs. exports
• Risks
–
–
–
–
Real estate bubble
Credit boom and bad loans
Unemployment
Social unrest
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3. Increasing role of emerging and
frontier markets (1/3)
• Tapering: gradual withdrawal of
Fed injections of liquidity
• Less capital available to finance
investment & growth
• Risk of sudden stoppage
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3. Increasing role of emerging and
frontier markets (2/3)
• Currency & price volatility
• Slow-down in convergence
• End to the factors fueling
emerging economies’ growth:
– High prices of raw materials
– Low interest rates
– External funding
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3. Increasing role of emerging and
frontier markets (3/3)
Example: Latin America
• Brazil facing serious slowdown
• Domestic factors also behind slowdown
in Chile, Colombia and others
• Venezuela and Argentina are
particularly vulnerable
– Argentina:
– Venezuela:
•
•
•
•
• 26% inflation
Hyperinflation
• Weak national
Price controls
Consumer supplies drying up currency and dollar
convertibility
Drop in GDP
• Low currency reserves
Source: The Economist
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4. Secular stagnation
• “Secular stagnation
hypothesis”—sustained
lower levels of output
• The new abnormal: EU &
Japan
• High public/private debt
Source: Eurostat
• Adverse demography
• Deflationary tendencies
• Decreasing productivity
• Structural unemployment in Southern
Europe
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5. Deflation
• Deflationary spirals are very dangerous;
they lead to postponement of investments,
and make debt-servicing harder.
• Prices are falling or flat in Greece,
Spain, UK, Ireland, and Portugal
• ECB task: keep prices stable ("inflation
rates below but close to 2%”), not
stimulate growth (in theory…)
• Inflation in “Euro Land” is around 0.7%
but little political support for higher
• Clashing interests
Source: Financial Times
– Core: wants low inflation and strong Euro
– Periphery: wants higher inflation and weak
Euro
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6. Drop in oil prices
• Structural or cyclical?
– Excess supply: fracking, but also Iraq, Iran,
etc.
– Weak demand: China slowdown
– Geopolitics: Saudi Arabia vs. Iran, US vs.
Venezuela, etc.
– Competitive dynamics
– Trading & speculation
• Good or bad?
– Growth stimulus vs. deflation
– Excessive supply vs. weak demand
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7. Quantitative easing and possible risk of
price effects
• German 10-year bond yield below ZERO
• Eurozone economy grew 0.4% in Q1 2015
• Asset price bubbles; EU stocks at 15-year high
Source: BBC
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8. World financial system remains vulnerable
• Shadow banking
• Credit boom and asset price
bubbles
• Regulatory uncertainty
• International liquidity crises:
sudden stops and capital outflows
• Systemic financial crises
• Stock market volatility and crashes
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9. On-going euro crisis (1/2)
• Unsustainable debt & meager
growth prospects in Southern
Europe
• EMU design flaws: Monetary
union, but no fiscal union, no
lender of last resort
• Risk of disorganized Grexit and
contagion
• Austerity programs socially
untenable. Democratic deficit of
EU institutions. ‘Emptying’ of
democracy. Return of nationalism.
• Risk of EMU fracturing, through
capital flight, unorderly sovereign
defaults (Grexit), voluntary/forced
Eurozone exit, etc.
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9. On-going euro crisis (2/2)
Why geopolitics matters
• Two key geopolitical events behind the Euro’s current
predicament:
• Beginning of reforms in China
• Growth and amassing of savings in emerging economies
• Fall of Berlin wall
• German re-unification, D-mark parity, recession, low interest rates in
Eurozone
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10. Structural unemployment (1/2)
Employment in US manufacturing industry (blue) vs Production (red)
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10. Structural unemployment (2/2)
Source: The Economist
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11. Rise of state capitalism
Market Value of State-owned Enterprises
as a % of GDP (2011)
Source: OECD
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12. Retrenching globalization
• Fragmentation in international trade and finance
• Dysfunctional global governance (UN, G20, WTO)
• Greater difficulty in reaching truly global agreements
– Regional trade agreements (TPP, TTIP), new regional institutions (AIIB, etc.)
– Alternative institutions and mediums of exchange (Yuan)
– Increasing diversity in economic models
EU-US and BRICS share of world economy
2014
2019
EU+US
33.3%
30.7%
BRICS
30.1%
32.7%
EU and Developing Asia share of world economy
1980
2014
EU
30.9%
18.4%
Developing Asia
7.54%
26.8%
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Group Reactions to Key Global Economic
And Geoeconomic Trends
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Rodrik’s Trilemma
Choose any two…but only two
Deep economic integration
Golden Straitjacket
Nation state
Global Federalism
Bretton Woods compromise
Democratic politics
Source: Dani Rodrik. ‘The Globalization Paradox’
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Global Economic and Geoeconomic Risks
1. Macroeconomic risks
2. Financial risks
3. Governance risks
4. Geoeconomic risks
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1. Macroeconomic Risks
• Global macroeconomic
imbalances
• Global growth slowdown
• Global economic and regional
recessions and crises
• Contagion of national
imbalances: recessions, fiscal
deficits, inflation, deflation, etc.
Source: voxukraine
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2. Financial Risks
• System financial crises
• Shadow banking
• Credit bubble contagion
• International liquidity crisis: sudden
stops and capital outflows
• Stock market volatility and crashes
• Currency wars
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3. Governance Risks
• Global economic governance shortcomings. Lack
of institutional capacity.
• Divergence between US, Japanese, and EU policies
• Excessive dependence on Central Banks
• International competition and new technologies
lead to low tax-gathering capabilities
• Incorporation of emerging markets in global
institutions
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4. Geoeconomic Risks
• Companies aligned with the interests of their states: diplomatic ambitions, supply of
raw materials, local job-creation, infrastructure, positioning on key trade routes, etc.
• Sovereign wealth funds buying critical infrastructures in foreign countries (ex. Huawey)
• Use of SWFs investment as a tool of foreign policy interference
• Companies faced with “unfair” competition by state-sponsored rivals
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Recommendations for EU Businesses
1. Boost the internationalization of European
businesses
2. Promote multi-localization (combining outsourcing
and market access) and SME collaboration
3. Rethink human resource strategies to attract
multicultural, flexible, and adaptable human capital
4. Focus on emerging social groups and new
consumption patterns
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Two-minute Paper
Please write for 2 minutes about what you have learned in today’s
session and why the information is important for EU businesses.
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Conclusion
Questions?
This powerpoint presentation and the matching teaching plan were developed as a part of the Jean Monnet project MEKBiz (Mainstreaming EU Knowledge
in Business Studies and Strategy), hosted by ESADEgeo – Center for Global Economy and Geopolitics and partially funded by the European Commission.
“The European Commission support for the production of this publication does not constitute an endorsement of the contents which reflects the views only
of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”
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