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THIS IS FINE

The wildcards that could sabotage the global economy in 2021

A black swan swims in a lake inside the Retiro Park in Madrid
Reuters/Sergio Perez
Say, what’s that emerging in the distance?
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You never see the one that gets you. This time last year, the coronavirus was already spreading, but it wasn’t until February that the world began to realize the magnitude of the challenge it faced.

There are undoubtedly ugly surprises awaiting us in 2021, despite the feeling that 2020 has really offered all the downside humanity can handle. In the spirit of a reverse-jinx, here is what would be keeping us up at night, if we weren’t already sleeping so poorly.

*POP*

Concerns about price bubbles are always in vogue, but especially so in the low-interest environment concocted by the world’s central bankers, with the US Federal Reserve no exception. Investors hunting for financial returns have driven many global equities—particularly in the US—past historical measures of price-to-value. You can see the froth in the rise of blank-check companies acquiring long-shot private firms, or in record junk-bond sales.

But calling the top of any market is tricky, and despite the fears of inflation hawks, central banks don’t seem inclined to end the current trend. A sudden bear market is likely to look more like 2001 than 2008—that is, expect business problems but not a financial system collapse. What could send a sell-off signal? Shakiness in government debt that prompts fear of inflation, unexpected pandemic setbacks slowing the recovery, or even aggressive regulatory action that might put the future cash flows of, say, tech giants, in question.

Hong Kong goes wrong.

China’s decision to end Hong Kong’s political independence early is a brutal disappointment for the island’s residents, but it could also present new challenges for the global economy. Thus far, the US and European Union have declined to enact the kind of sanctions that would rupture their lucrative trading relationships with China, privileging their prosperity over the rights of Hong Kongers.

The island’s role as the financial interchange between China and the world is simply too valuable. But geopolitical tensions are unlikely to diminish in the years ahead, and it’s possible to imagine an unexpected policy—Beijing cracking down on freedom of speech if Hong Kong bankers question its financial system, or US sanctions spooking capital flight—that might shake down the whole edifice.

Even something like the brewing fight over the reincarnation of the Dalai Lama, which could ramp up tensions between the US and China in Tibet, could set off the domino chain. A split between the two major economies in Hong Kong would be unthinkable, according to those in the know, which is precisely what makes it such a terrifying Black Swan.

Landlords lose

All those bars, restaurants, gyms, hotels, offices and salons closing up in the face of the coronavirus have something in common: They aren’t paying their landlords. Even as the recession ends, it may be many months before crowded urban centers become common again, and the way people use those buildings may change permanently in a new era of remote work. That’s going to put a lot of pressure on commercial real estate investors, particularly given what many saw as inflated values for urban land before the pandemic began: US commercial property debt hit a record $3 trillion in 2020. Costly work-outs to unwind borrowing from properties that no longer generate cash flows are inevitable, but if it takes longer than expected to end the coronavirus recession—or its impact on city living is more permanent than anticipated—falling investment in new development could hinder any rebound.

A US fiscal own goal

A Democratic president plus a Republican Congress tends to spell bickering, brinkmanship, and stagnation. Economists are already warning that more relief from the pandemic will likely be required in the spring, but even if Democrats win two seats in the Georgia special election this week, president Joe Biden will have to negotiate with a Senate that is unlikely to support major spending increases. If they don’t, he’ll face a chamber demanding immediate budget cuts. The same dynamic played out during Barack Obama’s administration, as a deadlocked Congress failed to agree on a spending plan to pull the US out of a recession. An arguably bigger problem, however, was the scorched earth negotiating strategy adopted by the Republican party around the country’s statutory borrowing limit. The minority party’s threats to default on US government debt if they didn’t get the budget they wanted in 2011 led to a market crash and the US losing its AAA borrower rating. Similar disagreements between the parties in 2021 promise to slow the recovery or even derail it.

A climate change disaster

If we hadn’t spent the last year fretting about a virus, we might have been worried about natural disasters. Climate change is exacerbating extreme weather—this year saw the US match a record for billion-dollar disasters last set in 2017 and 2011, with record wildfires in California, hurricanes pounding the coasts, and widespread flooding. Cyclone Amphan did $13 billion of damage to the Bay of Bengal, while unprecedented flooding across Africa will lead to a variety of woes. And yet, luckily, we did not see major cities destroyed or infrastructure like refineries blown off the map in ways that impact prosperity at large.

The world might not get off so easily in 2021, and a storm or flood at the wrong time could throw global recovery off course.

Cyberconsequences

The world’s dependence on digital infrastructure only became more important in 2020, as remote work became the gold standard for professional activities from banking and finance to computing to, well, every bit of economic activity not requiring physical interaction. Hackers, with access to increasingly sophisticated tools developed by governments, have targeted private companies in attempts to demand ransoms or resell personal information. State actors have proven their ability to penetrate critical government networks as well, with some like China and North Korea blending geopolitical and economic goals.

Given the importance of these networks to the financial system, the International Monetary Fund now says cybersecurity is a risk to financial stability. Beyond the risk of specific banks or businesses being compromised, one larger fear is that a major breach could shake confidence in the entire system.

Brexit’s drag race

The seemingly never-ending talks on the UK’s exit from the European Union and their economic relationship going forward have been resolved—only in 2020! Though prime minister Boris Johnson has made an agreement, there is little gain to be found. The UK avoided the tariffs that would have come with a no-deal Brexit, but its companies will face higher trade costs and the country’s growth will ultimately be about 4% slower. Lagging production in major economies is never helpful, but in 2021 it could delay global recovery and inject additional uncertainty into multinational investment decisions and currency markets. And there is still more deal-making ahead, particularly around financial services.

The likely kind of inflation crisis

The expansion of US debt in the past year has been enormous, with trillions of dollars spent on pandemic relief, on top of the massive borrowing created by president Donald Trump’s 2017 tax cuts predominantly for businesses and the wealthy. Despite the ongoing recession, the usual voices are arguing that prices are about to soar uncontrollably due to this fiscal expansion. The Fed, at least, having seen the same claims made after the 2008 crisis and little come from them, is making clear that it plans to keep on accommodating recovery, with a wary eye on prices.

The fear, though, is that the recovery in 2021 could lead to higher prices, as more people seek to resume normal activity with fewer businesses left to support them, and potential supply shortages if demand for goods like gasoline shoots up again. It may appear that inflation is rising, even if these are transient spikes caused by the structure of the economy. You can bet, however, on a chorus of warning against the menace of inflation. If the Fed were to abandon its policy of accommodation under this pressure and prematurely hike rates, we could see the same kind of stalled recovery that followed the Fed’s ill-advised decision to raise interest rates in 2015.

War

The global political situation is… shaky, to say the least. North Korea’s ability to launch nuclear missiles at the US and its allies remains a destabilizing factor in the Pacific. Tensions around China’s activities in disputed ocean territory (or Russia’s) create the conditions for brinkmanship that could go terribly wrong. US-backed assasination campaigns against Iranian officials threaten efforts to stabilize the Middle East. Conflicts along India’s disputed borders with Pakistan and China became more violent in 2020. Conflicts broke out in eastern Europe and western Africa. With economic pain and nationalism on the rise, the potential for a small conflict spinning out of control and disrupting the global economy exists. The doomsday clock developed by the Union of Concerned Scientists isn’t a perfect measure of all this risk, but it is extremely close to midnight.

Each of these potential icebergs in the path of shared prosperity shares a common theme: They are founded on a lack of trust and the difficulty of cooperation across gaps of nationality, class, or ideology. Yet the lesson of the coronavirus is that the only way to protect the global economy is through global cooperation and transparency—a lesson that 2021 may drive home.