As Mark Twain never said, “It ain’t what you don’t know that gets you into trouble. It’s what you think you know for sure that just ain’t so.”
Over the course of this year and next, the biggest economic risks will emerge in those areas where investors think recent patterns are unlikely to change.
They will include
- a growth recession in China,
- a rise in global long-term real interest rates and
- – a crescendo of populist economic policies that undermine the credibility of central bank independence, resulting in higher interest rates on “safe” advanced-country government bonds.
Of course, there are many other risks to global growth, including ever-increasing political chaos in the US, a messy Brexit, Italy’s shaky banks and heightened geopolitical tensions.
But these outside risks do not make the outlook for global growth necessarily grim. The baseline scenario for the US is still strong growth. Europe’s growth could be above trend as well, as it continues its long, slow recovery from the debt crisis at the beginning of the decade. And China’s economy has been proving doubters wrong for many years.
So 2019 could turn out to be another year of solid global growth. Unfortunately, it is likely to be a nerve-racking one as well.