• Citigroup releases report sounding alarm klaxon envisioning the death-knell and penultimate end of the current geopolitical world order •
2016 has begun, as 2015 ended, amid a significant worsening of the global political climate and with it, considerable volatility in financial markets. Investors and businesses are aware of the need to understand the drivers and the implications of a greater level of event risk exacerbated by shifting social patterns.
There’s little sign of this trend of political risk cutting across advanced and emerging-economies reversing. It’s unlikely that the moderate global growth that Citi’s economists forecast as their central scenario will dampen these risks. The data we’ve analyzed; viewed with our combined knowledge in comparative political science and international relations and security and defense analysis; underscores how, by many measures, these risks are on the rise and indeed could endanger even the already modest prospects for global growth
Political and business leaders will need to be more attuned to the new shape of global political risk, a paradigm shift that means that previous-policies will fail to keep pace and uncertainty will remain high, with the potential to interact in unexpected-ways. Among the key implications of this more fragile and interconnected risk outlook is that ‘Black Swan’ events — in this case, geopolitical events producing instability spanning several orders of magnitude — may be both more likely and more difficult for leaders and global financial institutions to resolve.
Over the long-term, failure to devise policies to address middle class anxiety and declining living standards increases the likelihood that Vox Populi risk — including mass protests and government collapses — could move from being episodically-disruptive to systemic; undermining globalization in the process. We’re deeply concerned that the political-capital necessary to stem the refugee crisis and terrorist threat, perhaps best-characterized as the collision between previous foreign-policy failures and current governance capacity, exceeds that available to government leaders, who have relied upon central banks to manage the lion’s share of global crises over the past several years. 2016 could be a very political year for markets.
Todd Akira Morikawa
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