Global economic growth risk components

The risk accumulation stemming from the epidemic, economy, supply and geopolitics point to a potential that may have an adverse effect on global economic growth.

Factors constituting growth risks… The risk accumulation stemming from the epidemic, economy, supply and geopolitics point to a potential that may have an adverse effect on global economic growth. In the current risk environment, Central banks' course of tightening their monetary policies to fight inflation creates a gap of uncertainty about what strategy they will advance if the equation becomes more complex. Could the Fed get into a dead end in this situation? Or, how do excessive commodity price increases, especially triggered by geopolitical risks, bring about a balance on inflation and growth risks?

 

The marginal factors of the geopolitical risk phenomenon… In general, the risk balance of the recent developments in Russia and Ukraine should be interpreted from this perspective. The statements of the US regarding a possible invasion continue persistently. This week's Blinken - Lavrov, maybe Biden - Putin talks may be important turning points for this reason. We did a lot of in-depth analysis of Russia's strategy. The model will be either very dynamic or uncertain as the risk perception is constantly updated with the news. However, risk managers definitely create stress scenarios against possible commodity price fluctuations in this direction.

 

Epidemic and inflation… As you can see, the Covid epidemic is not as effective as it used to be. The global community has both adapted to living with it and gained experience in the management of the crisis. The risk of the epidemic is now related to the economic extension. Because the pandemic left a legacy of a new crisis, which is inflation pressure based on global supply shortages. There are still supply problems in the world in terms of raw materials, semiconductors and energy groups. Existing strategic risks, of course, can add new effects through production and supply network difficulties. Most strikingly, there will be a global energy crisis, which will be the most important determinant of the fact that the major economies, which are trying to establish a policy balance in keeping their industries active and controlling inflation, will not be able to risk a war. The risks of economic growth, in fact, have formed a multi-element network, and in order not to cause an avalanche effect in the sense that crises that create each other do not occur, it is absolutely necessary not to make mistakes in economic management and political strategy.

 

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Comparison of global growth and Bloomberg Commodity Index… Source: Bloomberg, IMF

 

Strategies of central banks… In fact, up to a certain point, there is an increasing uncertainty range. Of course, different dynamics can be mentioned in a period like 2023-24 about how inflation and global growth will be. However, what is certain is that the current cycle is not enough for the future economic prospects to be better than the current one, and the dynamics must also improve. So, with all things stable, the economic situation will not be any better than it is now. Inflation has soared towards 7.5% in the US, and the added dynamics of energy prices indicate that the price increase momentum may be either at its current highs or one notch above it. This fear of high inflation lies at the root of the central bank's initiation of the tightening cycle in March, despite all the risks of economic growth.

 

Conclusion? Even if the tightening cycle progresses rapidly, price increases may remain high for a while, as central banks will not be able to influence especially supply-related and geopolitical-related problems. Besides, if we consider whether there is a slowdown risk in inflation; yes, there is a risk of cyclical slowdown as weakening in the production network will pull down industrial activity, and decreasing production will pull down demand after a while. Conceptually, this is called stagflation. While reliable investment banks predicted 3 rate hikes in 2022 until two months ago, updates such as 5 - 7 - 9 came over time. So, in the risks of supply chain troubles, do increases in financing costs that can cause demand shocks primarily control inflation or slow down growth? This is why it is important not to add to the risks of economic growth in the field of policy making. If we evaluate the current geopolitical risk phenomenon through the global supply and production network, we will face such a dilemma. In short, the more unknown terms added to the equation, the more difficult the solution becomes. Markets and money managers will act accordingly if the crisis phenomena remain alive. Valuations are subject to change with regard to interest rates and price assumptions.

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