Olivier Blanchard, chief economist at the International Monetary Fund, has identified three major risks faced by the global economy.
They are, in his words, low interest rates, war, and Europe:
1. “The long period of low interest rates has led to some search for yield, and financial markets may be too complacent about the future … Macro prudential tools are the right instruments, but one has to worry that they may not be up to the task.”
In other words, investors have ended up in some pretty risky positions that will hurt them if the interest rate environment changes or if the world sinks back into a full-fledged recession. Here’s a chart showing how money going into risky bonds has again surpassed that going into safer vehicles:
2. “Geopolitical risks have become more relevant. So far, there is little evidence that Ukraine crisis has had measurable effects beyond the affected countries and their immediate neighbours. Nor has turmoil in the Middle East affected either the level or the volatility of energy prices very much. But, clearly, the risk that they do so in the future is there, and could affect the world economy in a major way.”
3. “The third risk is a stalling of the recovery in the euro area, the risk that demand weakensfurther, and that low inflation turns into deflation. This is not our baseline, as we believefundamentals are slowly improving, but, were it to happen, it would clearly be the majorissue confronting the world economy.”
Euro Area GDP 1995-2014:
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