US-Iran conflict top risk to global economy in 2020: EIU

Renewed geopolitical uncertainty coupled with the emergence of novel coronavirus in China will limit any pick-up in business confidence and investment, and the balance of risks to the global economic outlook appears firmly tilted to the downside, according to the Economist Intelligence Unit (EIU).

Meanwhile, the social unrest seen across the world in 2019 looks set to continue in 2020, challenging both policymakers and business models. Global growth is forecast to be 2.9 per cent in 2020, close to decade lows.

The EIU has listed top five risks to the global economy in 2020, including the US-Iran conflict leading to a spike in global oil prices.

The EIU estimates that there is a 25 per cent chance that the US and Iran will be dragged into a direct, conventional war, which would have devastating consequences for the global economy. In particular, in this scenario, there is a distinct possibility that the Strait of Hormuz (through which about 20 per cent of global oil supplies transit) could be closed for an extended period of time.

EIU gives a 25 per cent chance for a trade war break out between the US and the EU. EU-US tensions will rise further this year, as the recent completion of a first-phase US-China trade deal causes the US' 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.

If the US does impose tariffs on EU auto imports, the impact on the EU economy, the world's second largest, would be severe: The auto industry accounts for about 6 per cent of total jobs in the EU, and beyond the immediate impact from lower exports to the US and third countries, there would be a sharp hit to the business confidence of core EU countries.

Another major risk is that coronavirus taking a lasting toll on the global economy, the likelihood of which is 20 per cent.

"We assess a 20 per cent probability that the virus will not be contained in China until mid-2020, and a 5 per cent chance that it will remain uncontained beyond 2020," the EIU said.

In the latter worst-case scenario, the economic impact would be much deeper and more persistent. Disruption of international trade would become entrenched as supply chains are diverted from China, with some countries possibly placing heavy restrictions on bilateral trade. A growing number of international exporters would experience financial distress, as a persistent shortfall in Chinese demand depresses commodity prices and export revenues.

"Taking into account the direct impact of weaker demand in China, as well as potential economic disruption in other countries should the coronavirus outbreak spread further globally, our forecast is that global real GDP growth could dip below 2.5 per cent this year," the EIU said.

There is a 20 per cent likelihood that debt burdens will 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 countries hoping for bilateral support from China or regional powers. Across a wider range of emerging markets, spending would be cut back, potentially tipping large parts of the world into recession.

Another risk is that the Hong Kong protests can cause an exodus from Asia's biggest financial centre, the likelihood for which is 15 per cent.

Since June 2019, Hong Kong has been rocked by serious social unrest. This was prompted initially by the local government's attempt to pass reforms to the territory's extradition laws, which would have allowed local residents to be extradited to mainland China.

If tensions continue to rise, there is a risk that the Chinese government could respond to persistent unrest and mounting pro-independence sentiment in Hong Kong by suspending the one-country two-systems mode of governance that allows the territory to enjoy wide-ranging autonomy.

These developments threaten Hong Kong's status as the world's third-most important financial centre. They would result in a swift departure of the foreign talent that lubricates Hong Kong's economy and prompts many, possibly most, foreign businesses in Hong Kong to close or relocate to other Asian cities, such as Singapore, Tokyo, Taipei or Bangkok.

( With inputs from IANS )