Recently, the World Economic Forum released its “Global Risks 2010” report, in which partners, including Swiss Re and other corporate and academic entities, collaborated to analyze the most serious global risks for the current year. This was the one of several posts we have run recently about the biggest risks ahead for 2010, whether economic, political or otherwise. One thing that we see through all of them is the word “China.” It will be interesting to keep an eye on this prediction and whether the country will hinder or help the U.S. in 2010.
To discuss this and the rest of the year ahead, I was fortunate enough to touch base with Kurt Karl, chief U.S. economist at Swiss Re, to get his take on this year’s report.
In your opinion, what is the biggest global risk facing the U.S. for 2010 and why?
Kurt Karl: The biggest global risk facing the U.S., as the “Global Risk 2010” report points out, is renewed asset price collapse. This would essentially be a global double-dip recession. With very high deficits and very low interest rates, another recession would be very difficult to combat. A return to recession could come from continued employment declines eroding consumer confidence, another banking sector scare or possibly a mutation in the pandemic virus which increases the fatalities causing consumers to panic and stop traveling and reduce shopping.
How will underinvestment in infrastructure (especially agriculture) affect the U.S. economy in the long run?
Karl: Infrastructure is essential for long-term growth and there is some evidence that the U.S. has been under-investing in infrastructure. Not only could this lead to catastrophes, such as the Minneapolis bridge collapse, but it would reduce economic growth by creating bottlenecks in, for example, the transportation system. The key risk for the agricultural sector is infrastructure that supports water supplies. This is partly an investment issue and increasingly a political issue. Reduced agricultural production will harm the US trade deficit — we export a lot of agricultural products — increase inflation and reduce standards of living.
What is the biggest, long-term international risk you see? And how will that affect the U.S.?
Karl: China, which is growing rapidly, is the biggest risk and the biggest opportunity for the U.S. economy. The global economy is increasingly dependent upon the health of the Chinese economy. At the same time, China needs to become a more open economy, with — ultimately — a floating exchange rate and free trade practices where it and other countries are competing on a level playing field.
What do you see as the biggest factor that could possibly prevent a complete economic recovery?
Karl: The biggest risk is global employment growth. If confidence turns sufficiently negative, companies will start cutting jobs again and that would kill the recovery.