World Competitiveness Center Director says global economy faces its greatest challenges since 2008
Arturo Bris, Professor of Finance at the top-ranked IMD business school and Director of the World Competitiveness Center, recently predicted that a crisis for the global economy is likely and that not enough action is being taken to avoid it. He said that based on statistics, the world could expect a financial crisis as soon as April 2015, ending in March 2016. Bris said the cause of crisis will come from eight possible scenarios:
1. A stock market bubble
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In the last year, stock markets have performed unrealistically well and at some point the situation will explode. In 2014, analysts were disappointed in the first quarter because earnings were not in line with market expectations. This means that if markets were to revert to a reasonable level with regards to earnings, there will be a stock market drop of between 30-35%.
2. Banking in China
A severe crisis could be driven by growing Chinese shadow banking, a system which consists of loans mainly to government institutions whose performance is not well monitored and not open to competition. If this system collapses, it will negatively affect the global economy.
3. Energy crisis
The United States, as the world’s largest producer of gas, could cause an energy crisis. If the US begins exporting to the rest of the world, Russia might feel threatened, causing a geopolitical storm. The US would have control over energy prices and would exert influence over countries like the UK, India and Japan.
4. Another real estate bubble
There is a risk of a property bubble forming in countries like Brazil, China, Canada or Germany. Prices are going up because availability of credit is huge and buyers are pushing prices up without realizing that they do not correspond to fundamental values.
5. Ratings & bankruptcy corporate crisis: ‘BBB as the new AA’
Companies currently have too much debt and the new norm is to have a BBB rating. In the US there are only three companies left with an AAA rating: ExxonMobil, Microsoft and Johnson & Johnson. If ratings are an indicator of bankruptcy, there will be bankruptcies across the board. If interest rates increased by 2%, half of the corporate sector would be wiped out.
6. War & conflict
Almost everywhere, except in parts of Europe and the US, there is increasing geopolitical tension, said Bris. Events like the current crisis in Crimea, could trigger a market crash, even if there is no war.
7. Increasing poverty
Overall world poverty has increased and whenever the poor become poorer, we can expect a social conflict. The crusade against income inequality could also further hinder innovation and growth by reducing the benefits of innovation, threatening the economy.
8. Cash and hyperinflation
The surplus of cash that central banks and corporations are holding could end up damaging the economy. The ECB is lending money to financial institutions that put it back into the ECB, which is a vicious circle and today Google could afford to buy a majority stake in Ireland and Microsoft could buy more than 50% of Singapore, which is immoral.
“While many economies seem to be finally rebounding since the 2008 crisis, we shouldn’t be complacent, ” Bris said. “Too often we do not learn from history and do not act when faced with a crisis we know is imminent.”
Arturo Bris is Professor of Finance at IMD and directs the IMD World Competitiveness Center. He was a keynote speaker at IMD’s Orchestrating Winning Performance program where he unveiled his predictions for the future.