A fully-fledged sovereign debt crisis, an asset price collapse and a slowdown in Chinese economic growth are among some of the biggest threats facing the world this year and beyond, the World Economic Forum (WEF) said on Thursday.
In its annual report on global risks, the WEF cautioned that the financial crisis and the ensuing recession have created a more vulnerable environment.
“Many countries are at risk of overextending unsustainable levels of debt, which in turn will extend strong upwards pressures on real interest rates. In the final instance, unsustainable debt levels could lead to a full-fledged sovereign debt crisis,” said the report, which will be submitted to the forum’s annual meeting in Davos, Switzerland, this month.
“Government debt levels of 100 percent of GDP — which is where the United States and the UK are heading — and higher are clearly not sustainable. There is an inherent risk that investors may take fright, they may question the sustainability of these debt levels. The result would be sovereign debt crises and defaults. Clearly Dubai and Greece were early warnings that should be heeded,” said Daniel Hofmann, group chief economist at Zurich Financial Services, a contributor.
The WEF was particularly concerned about China, saying that the country’s economy is on a “very unbalanced growth trajectory.”
Hoffman said that despite the fact China appears to have navigated the financial crisis and global recession, much of the domestic impulses derive from high credit growth, which entails an increased risk of misallocation of capital and renewed bubbles in financial asset prices and real estate.
“These can always carry the risk of a sharp and potentially recessionary correction,” he said. “A loss in China’s growth momentum could adversely affect global capital markets. The Chinese government needs to increase domestic demand to counter the loss in exports and maintain a stable renminbi [yuan] given China’s vast accumulation of foreign reserves.”
He said that if China’s annual growth rate falls below 6 percent, it could hit employment, fuel social unrest and hurt exports through the region and beyond.
“The implications of a fall in China’s growth would be particularly acute for its trading partners if it should happen before the global economy is on a more resilient path,” he said.
Other risks include chronic diseases such as Alzheimer’s and diabetes driving up health costs and reducing growth in developed and developing countries and under-investment in energy and agriculture.
The WEF also said there were numerous risks connected to Afghanistan and its instability cannot be separated from rising concerns over the situation in Pakistan.
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