Economic Prospects: risks for the International Economy

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This week we are publishing our mid-year review of Economic Prospects 2011. Today's blog summarises the risks to our central outlook for the International Economy.
Disorderly default in Europe
As difficult as it is to anticipate what will happen next in Europe, the increasingly likelihood of a Greek default is a significant risk for the economies of our major European trading partners. Already contagion is spreading to other Eurozone countries.
(More on the impact of the Greek debt-crisis on Italy and Spain from the FT)
US default, or US stagnation
If the US Congress does not raise its debt ceiling by the 22nd July then funds for US spending could run out on the 2nd August, potentially leading the US government to default on its debts. Although an unlikely outcome, Moody's, the rating agency, has warned that it “is no longer unthinkable”, and has put America's credit rating on negative watch. The impact of this could send shockwaves across the global economy, sending the US recovery into reverse, and trigger a global reassessment of risk.
(The Guardian offers a good basic explanation of the US borrowing crisis)
US stagnation
In recent days data releases have shown weak jobs growth in the US – below the level which would be associated with an increase in the employment rate, given a growing population – if the pace of job creation continues to come in at below 75,000 per month this would signal deep-seated stagnation in the US labour market.
(Stephanie Flanders' recent blog on the US jobs figures)
Inflation in emerging markets
Global growth has so far been driven by the Emerging Markets, but the strong growth in these economies has brought problems of its own, most notably, high inflation. Unless this is carefully managed it could lead to a hard landing for the overheating economies.
(Video on this from the FT)
The Arab Spring spills over
The unrest and upheavals in the Middle East has already contributed to rising oil prices, but the impact on the global economy has – so far – been limited. This could change if strife spread further across the region, particularly to important oil producers like Saudi Arabia.


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