The 4 biggest risks to the economy
By Scott Phillips (TMFGilla) - March 1, 2012
Four years since the GFC arrived – and seemingly wouldn’t leave – the global economy is showing signs of improving, particularly in the United States. Unemployment is falling. Production is on the rise. Debt is coming down. Confidence is going up. The improvement seems real. And I think it will continue.
Some of the best business minds actually expect an acceleration of sorts in the US once the excess of empty houses is soaked up by new household formation. As the world’s largest economy, the US has a massive role to play in pulling the rest of the world out of the economic mire.
We’re optimistic Fools and I’d venture to suggest the improvement is a certainty, but the timeframe is the question. It was Keynes who said ‘in the long run, we are all dead’. I hope to see at least a few more economic cycles before that point, but his message is valid.
What might stall or reverse this nascent recovery? Four threats should be kept in mind.
A rising Australian dollar has cushioned the pain for Australian motorists who otherwise would have felt significant pain at the pump. Petrol prices are only a couple of cents higher today, than two months ago. The US, devoid of the currency benefits we’ve enjoyed, has seen its petrol price increase 10% over that same period.
The oil price continues to rise, and while it’s always possible that the Aussie Dollar will increase further, recent reports suggest we might be seeing price increases of up to another 10 cents per litre in the coming couple of weeks.
With the world’s economy still largely powered by oil, a sharp increase could still cause growing pains – and that doesn’t allow for any geopolitical shocks that may arise out of the Middle East – an ever-present risk.
It feels like we’ve been talking about risks coming out of Europe forever, but that doesn’t make the concerns any less valid. Fallout from a Greece default or some other cataclysm within Europe’s banking system could deal the global (and likely the Australian) economies a body-blow.
Europe comprises a very large chunk of global consumer spending. A deep recession could substantially reduce the amount of global trade being conducted – and will undoubtedly have flow-on effects for other economies, not least the Chinese economy. Our links to the Chinese economy are obvious – and any reduction in demand for our resources could hit Australian GDP and employment.
Secondly, we could still wake up one morning to learn that global and Australian banks are more exposed to European assets than they assured us, especially given the interconnectedness of our global financial system.
The heading almost needs no explanation. We all know about the ructions in the Australian Labor Party over the past week and the simmering tensions over the past few months. Only an optimistic few are suggesting that we’ve seen the end of Labor leadership talk. Despite that, we have nothing on the currently dysfunctional United States polity.
When ratings agency Standard & Poors downgraded US debt last year, its reasoning was clear: “The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge,” the ratings agency wrote.
They didn’t mince their words.
Facebook has a sign in its corporate headquarters that says “Move fast and break things.” This seems fit for US Congress lately. And while it may be a good motto for a young technology company, it’s an awful way to run a country.
Something totally unforeseen
Author James Fallows once wrote, “What looks like tomorrow’s problem is rarely the real problem when tomorrow rolls around.”
There will be another crisis, another recession, and another panic. Many, in fact. And all will have something in common: They will be caused, at least in part, by factors and events that no one is talking about today. Japan could not have foreseen the economic hit caused by its tsunami last year. No one can predict the actions of a rogue trader. Wars, earthquakes, oil spills, assassinations… no one predicts these things because they can’t be predicted. But they can have a huge impact on the economy.
Warning of “something unknown” might seem like a cop-out when making a list of risks, but it’s probably the most important risk to think about. This is the basis of Nassim Taleb’s best-selling book The Black Swan: It’s the events we don’t think about, or those considered highly improbable, that inflict the most damage. If everyone knows something is going to happen, it’s probably nothing to worry about.
Once you accept that there will be periods of weakness and recession ahead and that we probably can’t predict what and why, it can actually be quite a calming realisation. You stop trying – in vain – to know all the answers. Instead, control the controllables, focus on what Steven Covey calls your ‘circle of influence’, and extend your investing horizon so that what seem like major economic dislocations become small bumps in the longer term trend. Then invest accordingly.
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Scott Phillips Is The Motley Fool’s feature columnist. You can follow him on Twitter @TMFGilla. The Motley Fool’s purpose is to educate, amuse and enrich investors.This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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Four years since the GFC arrived ? and seemingly wouldn?t leave ? the global economy is showing signs of improving, particularly in the United States. Unemployment is falling. Production is on the rise. Debt is coming down. Confidence is going up. The improvement seems real. And I think it will continue.
Some of the best business minds actually expect an acceleration of sorts in the US once the excess of empty houses is soaked up by new household formation. As the world?s largest economy, the US has a massive role to play in pulling the rest of the world out…