- 2018 is shaping up to be an exceptional year for global financial markets, with the economies of nearly every developed country growing in synchrony for the first time since the financial crisis.
- A top Wall Street executive who regularly speaks with corporate CEOs says two primary risks could scuttle global growth.
- The bigger risk is that growth accelerates too quickly and inflation soars. The other risk is of a geopolitical flare-up.
Corporate executives are teeming with optimism as 2018 is shaping up to be an exceptional year for global financial markets, with the economies of nearly all developed countries growing in synchrony for the first time since the financial crisis.
Citi’s Financial Strategy and Solutions Group estimates that 75% of major economies are expected to generate more than 2% gross-domestic-product growth, and aggregate corporate earnings are expected to climb by 10.1% in 2018 — both substantial increases from recent years.
So, what could go wrong to spoil all the fun? That’s what was on the mind of every corporate bigwig at the World Economic Forum last week in Davos, Switzerland.
Business Insider recently spoke with a top Wall Street executive who said that question popped up over and over again during his gantlet of 20-plus meetings with CEOs at the annual summit in the Swiss Alps.
The executive, who requested anonymity, told us there were two primary risks that could scuttle the global economic surge.
The most significant risk, he said, is that economic growth accelerates too quickly and stokes inflation.
That sentiment was echoed Wednesday by Michael Arone, the chief investment strategist at the $2.8 trillion investor State Street Global Advisors.
“What will move us from expansion to contraction is inflation,” Arone said. “It often causes the Fed to aggressively raise interest rates and ultimately they end up curtailing the expansion prematurely. That is one of the things that the market is fearful of right now. I think those fears are overstated, but that’s one of the anxieties reflected in the last couple of days’ action.”
The Federal Reserve left interest rates unchanged Wednesday but said it expected inflation to pick up.
The second risk that could that stop the music in an instant is a geopolitical flare-up.
The world has generally relied on the US for stability, but with a mercurial leader like Donald Trump in the White House, the US position on the global stage is a lot more unpredictable. That has other countries “antsy,” the executive said.
A trade war with China or an actual war with North Korea would roil markets, as would a blow-up with a neighboring trade partner like Mexico. These tail risks are still minimal, the Wall Street executive stressed, but they’re increased from past years.
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