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Major economic risks facing the world

January 14, 2010 18:09 IST

Strong worries over further asset bubbles, underinvestment in infrastructure, falling government finances, and the consequent danger to economies to sink into a major debt crisis are some of the top threats facing the world in 2010, the World Economic Forum said on Thursday.

Global Risks 2010, WEF's annual report on the most significant and underlying global risks facing the global economy this year and beyond, argues that the events of the past year have revealed a fundamental need to change the thinking on global risks and how they are managed.

With unprecedented levels of interconnectedness between all areas of risk, the report stresses that the need to combat governance gaps globally is greater than ever.

The report says that this can only be addressed by an overhaul of current values and behaviours by decision-makers to improve coordination and supervision.

The report also highlights risks where the levels of awareness and preparedness are currently very low; these include transnational crime and corruption, cyber-vulnerability and biodiversity loss.

Global Risks 2010 notes that the response to the impact of the financial crisis and ensuing downturn has been a greater willingness to cooperate on common strategies and develop more effective global governance to address global risks.

Some of the risks facing the globe include:

Fiscal crises

In response to the financial crisis, many countries are at risk of overextending unsustainable levels of debt, which, in turn, will exert strong upwards pressures on real interest rates. In the final instance, unsustainable debt levels could lead to full-fledged sovereign debt crises. These crises also have social and political implications of high unemployment.

Underinvestment in infrastructure

Multiple studies across the world repeatedly highlighted that vast segments of our water, energy or transport infrastructure are structurally deficient or functionally obsolete, requiring considerable annual investments to avoid catastrophic failure.

Underinvestment in infrastructure, both new and existing, and its consequences for growth, resource scarcity and climate change adaptation.

A massive $35 trillion of infrastructure investment is required over the next 20 years, according to the World Bank.

Chronic diseases

As a consequence of profound socio-demographical transitions among large sections of the world population, changing physical and dietary habits, chronic diseases including cancer, diabetes, cardiovascular and chronic respiratory disease are continuing to spread rapidly throughout the developed and developing world, driving up health costs while reducing productivity and economic growth.

Asset price collapse

The fact that the risk of an asset price collapse remains the strongest risk on the landscape on the severity and likelihood axes illustrates the continuing uncertainty about the resilience of the global economy and the effectiveness of fiscal and monetary responses, governance and regulation.

Concerns abound about the decline in the dollar and low interest rates fuelling another bubble, this time liquidity rather than debt-driven. Experts are also worried about a lag in the impact of the recession in a number of areas. The level of corporate bankruptcies, particularly among small and medium size enterprises remains high.

Credit card default rates, which are highly correlated with unemployment, are already at historic levels. The current unemployment rate of more than 10% in the US is considerably higher than the 6.5% unemployment rate that most credit card lending models assume.

Finally, though residential house prices have fallen considerably in those markets considered to have been the most overheated, concerns persist about commercial real estate.

China's growth falling to 6% or less

China appears to have successfully navigated the financial crisis and global recession. However, much of the domestic impulses derive from high credit growth, which entails an increased risk of misallocation of capital and renewed bubbles in financial asset prices and real estate. These can always carry the risk of a sharp and potentially recessionary correction.

A loss in China's growth momentum could adversely affect global capital and commodity markets. The Chinese government faces a number of challenges: the need to increase domestic demand to counter the loss in exports and the need to maintain a stable renminbi given China's vast accumulation of foreign reserves.

The implications of a fall in China's growth would be particularly acute for its trading partners if it should happen before the global economy is on a more resilient path.

Afghanistan

Though geopolitical risks were not the focus of this year's report, among those tracked by the Global Risk Network, including Iran and Israel-Palestinian Territories, Afghanistan emerged highest on the Global Risks Landscape. It is also linked to nearly all the other geopolitical risks and several economic risks on the RIM.

Moreover, Afghanistan's instability cannot be dissociated from rising concerns over the situation in Pakistan. The border between the two countries has become a hotspot.

The instability in the region is already a source of suffering for the local population. Their plight is compounded by the stress that rapid population growth and the impact of climate change are placing on resources, in particular water.

Other risks include gaps in global governance, transnational crime and corruption; biodiversity loss; and cyber-vulnerability.

Robert Greenhill, managing director and chief business officer at the World Economic Forum, said Global Risks 2010 underlines the challenges ahead: "The findings of the report confirm that we must face up to the challenges created by these unprecedented levels of interconnectedness between risks. The financial crisis and the ensuing recession have created a more vulnerable environment where unaddressed risks may become tomorrow's crises."

"This is particularly acute for agriculture and food security," said Swiss Re's chief risk officer Raj Singh. "We need a vast increase in food production to feed the growing world population, and a billion people are already undernourished. Billions of dollars need to be spent on water provision, energy supply, transport and climate change adaptation measures. Governments must work together with the private sector to make it happen. Insurers can provide risk management tools that create greater financial stability for farmers and the agriculture industry."

However, Sheana Tambourgi, editor of the report and Director and Head of the Global Risk Network at the World Economic Forum, warned, "The next few months will put the willingness among global decision-makers to cooperate on addressing global risks to the test. Simply reverting to 'business as usual' could have serious implications in the long term in several risk areas."