The Economist Intelligence Unit has estimated that there is a 25 per cent chance that the US and Iran will engage in a direct, conventional war.
As business sentiment across the globe is gloomy, there are five areas where the trouble may further escalate. The US-China trade war, Brexit, sanctions on oil trade, and the attack on Saudi Aramco’s oil facility destabilised the geopolitical balance in the previous year. In recent times, shifting trend growth in several economies, global spillover effects and disconnect between the financial cycles and business cycles in the face of supply shocks broadly explain why monetary policy around the world is in a state of flux, RBI said in its February bulletin.
The previous estimates of global growth have been lowered due to new threats. Even the Economist Intelligence Unit previously expected global growth to be slightly faster in 2020. However, renewed geopolitical uncertainty including tensions between the US and Iran flared up again in January, coupled with the emergence of a novel coronavirus in China. The EIU predicts that these factors will limit any pick-up in business confidence and investment, and the balance of risks to the outlook appears firmly tilted to the downside.
On top of it, the social unrest seen across the world in 2019 is also expected to continue in 2020, challenging both policymakers and business models.
Five areas of potential threat:
- US-Iran conflict may lead to a spike in global oil prices
The Economist Intelligence Unit has estimated that there is a 25 per cent chance that the US and Iran will engage in a direct, conventional war, which would have devastating consequences for the global economy. It has also pointed out that there is a distinct possibility that the Strait of Hormuz, which is a source of around 20 per cent of global oil supplies transit, could be closed for an extended period of time.
- A trade war may break out between the US and the EU
The Economist Intelligence Unit also predicts that the EU-US tensions will rise further this year, as the recent completion of a first-phase US-China trade deal has caused the US’s attention to shift back to the EU’s trade surplus with the US, and the EU’s position becomes more assertive with a new Commission in place. As a result, a further escalation in tariffs involving the US and EU auto industries cannot be ruled out. The report estimates 25 per cent chances of its occurrence.
- Coronavirus may take a lasting toll on the global economy
The EIU has assessed a 20 per cent probability that the virus will not be completely contained in China until mid-2020, and a 5 per cent chance will remain of it being uncontained beyond 2020. In the latter worst-case scenario, the economic impact would be much deeper and more persistent.
- Debt burdens may cause a recession across emerging markets
Fragile economies that have recently seen a stabilisation in their currencies, such as Turkey and Argentina, could rapidly fall back into crisis, and new crises could emerge, particularly in the countries hoping for bilateral support from China or regional powers.
- Hong Kong protests may cause an exodus from Asia’s biggest financial centre
The EIU report has also highlighted that there is a distinct chance that protests could flare up again this year if existing civil rights are seen to be under threat over the longer term. This could occur around the elections for the Legislative Council scheduled for September 2020.