Biggest global discontinuity risk is to the upside

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, November 28, 2018. REUTERS/Staff
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LONDON (Reuters Breakingviews) – More of the gloomy same has been the rule for a few years now. Jaded investors expect more discord and economic slowdowns, and send global bond yields ever further downwards in the hope that central banks throw more stimulus in their direction. This dark complacency could be upended.

There are no recent signs of change. In recent days, French President Emmanuel Macron decided not even to try to draft a communiqué for this weekend’s meeting of the G7 leaders of developed economies in Biarritz, and his proposal to discuss fires in the Amazon was rejected by Brazilian President Jair Bolsonaro as evoking “a colonialist mentality”. A revision of U.S. statistics removed about half of the reported employment created since President Donald Trump’s tax stimulus.

Then there is British Prime Minister Boris Johnson, who wanders around the capitals of Europe without either a plan to avoid a hard Brexit or a parliamentary majority to support one. The potentially violent standoffs in Hong Kong, Kashmir and the Gulf will continue. And recessions and slowing growth threaten the United States, the euro zone, China and India, just to name the most prominent countries.

The is no end in sight to the new normal of bitter but inconclusive politics, politically inadequate economic growth and dramatic but largely ineffective interventions from central banks. Nor is the United States likely to resume its familiar role as global policeman. The longer and harder global tensions are stretched, the greater the risk of a major tear.

A bad scenario is too depressing for late summer, so consider a good one. Suppose the multi-year British Brexit fight ends with Britain remaining in the European Union. That outcome currently seems so unlikely that its arrival could trigger a burst of confidence throughout Europe, especially if a new and less bitter Italian government gains some traction.

Warming to the theme, Trump’s erratic behaviour and a U.S. recession could spark a political revolution there. The Chinese authorities might decide that patience is better than violence in Hong Kong. Weak economies might dampen voters’ enthusiasm for crony capitalist governments.

Economic slowdowns and political radicalism are not new, so an investor with an unhedged bet on optimism would be a lunatic. But in the current environment it’s a long way up as well as down.