Shift in Perception of Economic Risks for Businesses

The latest survey by Oxford Economics reveals that businesses now consider geopolitical tensions to be the biggest threat to the global economy.

According to Jamie Thompson, head of macro scenarios and author of the survey, this finding “confirms” the significant shift in economic risk perceptions for businesses. He emphasizes that geopolitical tensions are now the main concern in both the near term and the medium term.

Currently, approximately 36% of businesses polled identify geopolitical tensions, such as those related to Taiwan, South Korea, and Russia-NATO, as the top risks.

Compared to a similar survey conducted in April, where a marked tightening in credit supply or a full-blown financial crisis were viewed as the top risks, the focus has now shifted to geopolitical tensions.

The third quarter 2023 Global Risk Survey, conducted from July 6-27, included responses from 127 businesses.

Fraught Relations Between US and China

Tensions between the United States and China have reached their lowest point in years. An incident where the US shot down a suspected Chinese surveillance balloon over American airspace has escalated the situation.

China insists that the Taiwan issue is an internal affair and warns the US not to cross the red line. Beijing considers Taiwan as part of its territory. In response, the Biden administration recently announced a weapons aid package to Taiwan worth up to $345 million, likely further angering China.

Russia’s invasion of Ukraine has strained its relationship with NATO. Russian President Vladimir Putin has been opposed to NATO’s expansion, claiming it poses a threat to Moscow’s national security.

The survey indicates that while businesses still consider high inflation a significant near-term risk, they are more confident that the problem will eventually moderate.

Thompson states that respondents’ expectations for world consumer price inflation in 2024 stand at 3.7%, slightly below the latest baseline forecast.

Expected inflation over the medium term has significantly decreased, reversing the upward trend of the past two years.

Continued Concerns over Banking System Risks

Although concerns over banking system risks have eased, they remain elevated. Around 30% of respondents still view a marked tightening in credit supply or a full-blown financial crisis as top risks in the near term.

Some investors, including Kevin O’Leary, predict that the ongoing cycle of US Federal Reserve rate hikes may lead to more regional US bank failures. Several regional banks, such as First Republic, Silicon Valley Bank, and Signature Bank, have already folded since March, destabilized by the Fed’s tightening cycle that has seen 11 rate hikes since March 2022.

Geopolitical risks continue to be a major concern for businesses in the next five years, with over 60% of respondents considering them a “very significant risk” to the world economy.

Thompson states that more than three-fifths of respondents view geopolitical risks as a significant risk to the global economy over the medium term. An intensification of geopolitical tensions could potentially trigger significant deglobalization of trade and the financial system.

Deglobalization ranks as the third most cited risk in the survey, with 23% of respondents considering it a “very significant risk.”

Around 25% of respondents view early policy rate cuts as one of the top upside risks. However, businesses see a reduced chance of a China-driven upturn. China’s reopening as the top global upside has almost halved in the past three months, down to 10% compared to 19% in April.

According to the International Monetary Fund, China’s post-Covid economic recovery is losing steam and impacting the world economy. Weakness in the Chinese real estate sector, low foreign demand, and high youth unemployment are factors contributing to the economic slowdown.