Global growth faces risks
While economists Mohamed El Erian of Allianz, Allen Sinai of Decision Economics and Morgan Stanley's Joachim Fels see growth speeding up this year, mounting geopolitical strains in Ukraine and elsewhere are prompting them to turn more guarded about the outlook. "There is a significant tail risk that's growing for the world economy," said Sinai, chief executive officer of the New York-based consultant. He sees a 10 per cent chance of a global recession triggered by escalating tensions between Russia and the US and Europe over Ukraine.
The crisis in Crimea isn't the only concern financial markets must grapple with. On the lengthy list of what former US Defence Secretary Donald Rumsfeld dubbed "known unknowns" are elections in some emerging markets starting with Turkey on March 30, the Syrian civil war and negotiations over Iran's nuclear programme, which could be complicated by the US-Russia standoff in eastern Europe.
Global investors are on the alert. The share of cash in their portfolios is the highest since July 2012, according to a March 7-13 survey by Bank of America Merrill Lynch of 241 fund managers who oversee $636 billion in assets.
US stocks fell the past two days, erasing gains that sent the Standard & Poor's 500 Index to within three points of a record, on worries the situation in Ukraine may escalate after President Barack Obama said the international order is being tested. Businesses also are becoming concerned. Seventy per cent of 1,403 corporate executives polled by consultants McKinsey & Co this month cited geopolitical tensions as a risk to global growth in the next year, up from 27 per cent in December.
"Heaven knows, there's a lot of geopolitical events out there that may be, God forbid, that we'd get into some sort of war and some sort of large intervention event," Andrew Liveris, chief executive officer of Dow Chemical Co, told analysts on a March 19 conference call. Midland, Michigan-based Dow is the largest US chemical maker. Central bankers and finance ministers will debate the potential economic fallout in Washington April 11-13 at spring meetings of the International Monetary Fund and World Bank. El Erian, chief economic adviser to Munich-based Allianz, said in an email he is sticking with his prediction that worldwide growth will pick up this year. What's changed is a greater chance there won't be any acceleration, he said.
Fels and his team at New Yorkbased Morgan Stanley agree, saying in a March 16 report that the risks to their forecast of 3.4 per cent growth this year "are generally tilting to the downside." The world economy expanded three per cent in 2013. Those risks are centered on developing nations. The Morgan Stanley economists cited "volatility" from elections as a reason for cutting their forecast for emerging-market growth this year to 4.7 per cent from five per cent. The biggest worry is Ukraine. Obama warned Russia on March 25 it would face the consequences of tougher sanctions if it encroaches further into the country. The US and European Union already have frozen assets of Russian and Crimean officials in retaliation for Moscow's move.
Russia has consolidated control over Crimea and is maintaining forces along the border with Ukraine in what Obama said "appears to be an effort of intimidation." The confrontation between Moscow and Washington is the most serious since the Soviet Union collapsed more than two decades ago. "It raises an unknown," said Russ Koesterich, chief investment strategist at New York-based BlackRock, which manages $4.3 trillion in assets.