Macroscope | Biggest risk to the world economy lies currently in Europe, not in China
Banking black clouds in Portugal, Italy and most-importantly Germany leave Europe on the ropes, and maybe just one serious blow away from knockout
Economists such as Harvard University’s Ken Rogoff may believe that the greatest risk to the global economy comes from an economic slowdown in China – but in reality perhaps the most clear and present danger for the world economy emanates from Europe where there is renewed focus on a perceived fragility in the European banking system.
In fairness to Rogoff, a former chief economist at the International Monetary Fund (IMF), he has been remarkably consistent on this issue.
As far back as May 2014 he wrote that a hard economic landing for the Chinese economy probably “ranked as the number one risk to the global economy today”.
In truth too, last month the Basel-based Bank for International Settlements, often referred to as the central banks’ central bank, highlighted how debt was building within the Chinese economy noting how China had accrued a credit-to-gross-domestic-product ratio of 30.1 per cent, the highest for any nation since collection of such data began in 1995.
But at the beginning of October 2016, it is problems in Europe that perhaps demand the attention of investors and policymakers alike.
Though not their base scenario, on Friday French bank Societe Generale pondered whether the rating agency DBRS might cut Portugal to sub-investment grade in its review due on 21 October, a development that could leave Portuguese banks ineligible for access to European Central Bank (ECB) liquidity and reliant on Emergency Liquidity Assistance funding via Portugal’s own central bank.
