Businesses Identify Geopolitical Tensions as the Biggest Threat to the Global Economy
Shifting Perceptions of Economic Risk
A recent survey conducted by Oxford Economics reveals that businesses consider geopolitical tensions as the most significant threat to the global economy at present. Jamie Thompson, the head of macro scenarios and author of the survey, states that this finding confirms a significant shift in the perception of economic risks by businesses. Geopolitical tensions are now the primary concern for businesses in both the short and medium term.
In the survey, approximately 36% of businesses view geopolitical tensions, such as those related to Taiwan, South Korea, and Russia-NATO, as the top risks currently. This contrasts with a similar survey conducted in April, where nearly half of the respondents identified a tightening in credit supply or a full-blown financial crisis as the top risk in the near term.
Current Geopolitical Dynamics
The survey’s findings come at a time when relations between Washington and Beijing are strained, reaching their lowest point in years. Tensions have escalated following the U.S. shooting down a suspected Chinese surveillance balloon in American airspace. China considers Taiwan an internal affair and has warned the U.S. that it is a red line that must not be crossed.
Furthermore, Russia’s invasion of Ukraine has strained its relations with the North Atlantic Treaty Organization (NATO). Russian President Vladimir Putin has long been concerned about NATO’s expansion, claiming it poses a threat to Moscow’s national security.
Easing Inflation Concerns
While businesses still perceive high inflation as a significant near-term risk, they express confidence that the issue will eventually moderate. Respondents’ expectations for world consumer price inflation stand at 3.7% in 2024, slightly below the latest baseline forecast. Additionally, expected inflation over the medium term has significantly decreased, reversing the upward trend observed in the past two years.
Concerns over Banking System Risks
The survey also highlights easing concerns over banking system-related risks, although these concerns remain elevated. Around 30% of respondents still view a marked tightening in credit supply or a full-blown financial crisis as top risks in the near term. Some investors, like Kevin O’Leary, predict that the ongoing cycle of U.S. Federal Reserve rate hikes could lead to more regional U.S. bank failures.
Regional banks, including First Republic, Silicon Valley Bank, and Signature Bank, have already failed due to the Fed’s monetary tightening cycle, which has seen 11 rate hikes since March 2022.
Future Risks and Deglobalization
Geopolitical risks continue to be a major concern for businesses over the next five years, with over 60% of respondents perceiving it as a “very significant risk” to the world economy. An intensification of geopolitical tensions could trigger a significant deglobalization of trade and the financial system.
The survey also identifies deglobalization as the third most cited risk, with 23% of respondents considering it a “very significant risk.” Additionally, around 25% of businesses view early policy rate cuts as one of the top upside risks. However, businesses see a decreased chance of a China-driven economic upturn, with China’s reopening as the top global upside nearly halving in the past three months.
The International Monetary Fund recently highlighted China’s post-Covid economic recovery losing momentum and impacting the global economy. Weakness in the Chinese real estate sector, low foreign demand, and high youth unemployment contribute to this concern.
