Coronavirus, Iran Conflict Among Biggest Threats to the Economy in 2020

By Andrew Soergel

The ongoing spread of the coronavirus and a possible trade war between the U.S. and the European Union are among the greatest threats to the global economy this year, according to a new report from The Economist Intelligence Unit that predicts a “moderation in U.S. growth” and suggests risks are “firmly tilted to the downside.”

The EIU’s report identifies five problem areas that have the potential to significantly derail global economic progress in 2020 – while also assessing the likelihood that any of these risks actually plays out. Among the threats considered to be the most likely to impede global economic progress this year: President Donald Trump’s administration entering into a military conflict with Iran or trade showdown with Europe.

Top Risks in 2020

  1. A U.S.-Iran conflict causes spike in oil prices (25% likelihood)
  2. A U.S.-EU trade war (25% likelihood)
  3. Coronavirus takes “lasting toll” on economy (20% likelihood)
  4. Debt burdens lead to emerging markets recession (20% likelihood)
  5. Hong Kong protests lead to Asian financial shakeup (15% likelihood)

Tension between the Trump administration and Iranian leadership had been bubbling for years and turned violent last month when President Donald Trump authorized the killing of Iranian General Qasem Soleimani. After U.S. forces killed him in a drone strike, Iran responded with retaliatory strikes on U.S. military bases in Iraq – no Americans were killed in the strikes.

“Furthermore, there is a high risk that Iran will launch targeted attacks against U.S. interests in the Middle East in the coming months,” according to the report, singling out U.S. interests in Yemen, Lebanon, Syria and Iraq as likely targets. “As a result, the risk of an unintended slide into an escalating military conflict cannot be ruled out.”

A subsequent oil supply shortage could then “cause oil prices to rise to as much as $90/barrel, fueling a rise in global inflation and dampening consumer and business sentiment,” according to the report.

Equally likely to hurt the global economy, according to the report, is the chance that a U.S.-EU trade dispute leads to tit-for-tat tariff implementation, commerce restrictions and diminished output among some of the world’s most significant Western economies. Although last year’s dispute between the U.S. and China appears to have been temporarily resolved with the signing of a partial trade agreement last month, U.S. farmers and manufacturers slogged through much of 2019 without normal access to one of America’s biggest business partners. A conflict with Europe would likely produce similar results.

Third on the EIU’s list of global economic threats is the ongoing spread of the coronavirus, which as of Wednesday morning had sickened more than 80,000 and killed more than 2,700. Analysts have widely predicted in recent days that the outbreak would weigh on international businesses and ultimately lead to slower economic growth in China and throughout much of the rest of the world. The EIU believes there is a 75% chance the virus is contained within China by the end of February or the end of March. Such containment would still leave an economic scar – but one that wouldn’t run quite as deep as a prolonged outbreak.

Still, the report suggests there is a 25% chance that the virus is either not contained until the end of June or is simply not contained at all in 2020. In such a worst-case scenario, trade with and travel to China would be restricted around the world and an “ongoing public health crisis would also be a threat to political and financial stability within China itself,” according to the study.

“Disruption of international trade would become entrenched as supply chains are diverted from China, with some countries possibly placing heavy restrictions on bilateral trade,” according to the report. “U.S.-China trade tensions would be more likely to re-escalate, particularly if China proves unwilling or unable to deliver the import commitments agreed under the recent first-phase limited trade deal.”

Also among the threats to the global economy are high levels of global debt, particularly among fragile emerging economies such as Turkey and Argentina. The EIU also cites the potential for ongoing social unrest in Hong Kong to lead the Chinese government to crack down more heavily on the region, effectively generating “serious and sudden economic dislocation” and threatening Hong Kong’s status as one of the world’s premier financial centers.

Such a development would “result in a swift departure of the foreign talent that lubricates Hong Kong’s economy and prompt many, possibly most, foreign businesses in Hong Kong to close or relocate to other Asian cities, such as Singapore, Tokyo, Taipei or Bangkok,” according to the report.

“Global growth is forecast to be 2.9% in 2020, close to decade lows,” the study’s authors said in an introduction to the report. “Against this backdrop, policymakers and businesses should prepare for further volatility in 2020.”

Andrew Soergel is a senior writer covering economics for U.S. News & World Report.

*This article was expanded from original source published by U.S. News & World Report.

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