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January 4, 2018

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‘Black swans’ events may hurt world economy

WHILE the world economy has seen a broad-based recovery in the past year, Chinese observers are wary that some “black swan” events could dampen growth prospects in 2018.

Unique, eye-catching, and hard to find, a black swan is as a metaphor to describe rare events that could cause catastrophic ramifications.

“One of the reasons behind economic strength last year was that we hardly saw any black swans,” said Zhang Ming, a researcher with the Chinese Academy of Social Sciences.

A report by the Institute of World Economics and Politics under the CASS predicted that the global economy would expand 3.5 percent in 2018 on purchasing power parity terms.

The rate is below previous estimates by international bodies including the International Monetary Fund, which predicted in its World Economic Outlook in October that the global economy would grow by 3.7 percent in 2018.

“The lower prediction reflected our concerns over issues including asset price bubbles, high debt levels and geopolitical conflicts,” said Yao Zhizhong, another researcher with CASS.

According to Zhang, there are at least six black swans that observers should keep an eye on to cushion against their impact.

“The fact that risks did not happen does not mean that they do not exist,” Zhang said.

One of the major uncertainties comes from the political realm. The long-simmering rivalry between global and regional powers in the Middle East could become even more complicated, adding pressure to fluctuations in global crude oil prices.

Elections in Italy could also lead to black swan events such as the country leaving the eurozone or defaulting on its treasury bonds, derailing recovery in Europe, according to Zhang.

While anti-globalization sentiment did not deter major economies from benefiting from trade in 2017, any change in the trade policy stance of the Trump administration could affect global growth.

The US economy has maintained mild inflation recently, but a sudden rise could speed up rates hikes and balance sheet reduction by the Federal Reserve.

Such incidents, though unlikely, could slow economic growth in the United States and have widespread spill-over effects.

Another outlier would put an end to the nine-year-long bull market in the United States. The price-earning ratio of the US stock market is reaching historic highs, and some analysts worry that a downturn in the market could be sharp and long-lasting.

“Once the US stock market takes a downturn, it could have a negative impact on asset prices in other countries, and curb consumer spending in the United States, which was the most important driver for its recent recovery,” Zhang said.

Such black swans could also have interrelated effects, causing other rare events to happen, Zhang said.

Faster-than-expected rates hikes in the United States, for example, would lead to a stronger US dollar that could possibly result in capital outflows and currency depreciation in some emerging economies, which enjoyed short-term capital inflows in 2017.


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