Rising risks of a new world financial crisis

The chance of China sustaining a growth rate of 9% for another two decades is less than 1 in 100.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

China and India are at risk of a sudden slowdown as there is no precedent for their high growth rates being sustained. This conclusion, reported in today's Australian newspaper, is the result of an influential Harvard study by President Barack Obama's former chief economic adviser Larry Summers and his colleague Lant Pritchett.

The study found that periods of rapid growth nearly always revert back to long-term average world growth rates, with the end usually coming suddenly. The chance of China sustaining a growth rate of 9% for another two decades is less than 1 in 100.

These conclusions come at the same time that the Organisation for Economic Co-operation and Development (OECD) has stated that there are rising risks of a new world financial crisis sparked by financial weakness in emerging countries, particularly Indonesia and India. Those same countries have been responsible for the vast majority of global economic growth since the global financial crisis, but currently have large external deficits.

Since May, the OECD has lowered its estimate for 2014 growth for the developing world from 6.2% to 5.3%, but the latest commentary highlights a concern about that figure being attainable.

Obviously this has implications for all advanced economies, including Australia. The rise of emerging economies over the past decade has transformed the Australian economy by generating vast demand for resources and driving rapid growth in world trade.

Foolish takeaway

The CIA closely monitors internet chatter to avert terrorist strikes. Similarly there has been increasing economic assessments by leading organisations and market pundits, voicing concerns over world growth. Additionally, the growth risks inherent in potential deflationary forces worldwide have been constantly referred to in recent weeks.

Let us not pretend that an exact turning point can be predicted, however with many leading indices in the developed world at all-time highs, there may be pause for thought given world growth prospects. This would impact mining companies such as Rio Tinto (ASX: RIO), BHP Billiton (ASX: BHP) and Fortescue Metals Group (ASX: FMG).

It's just as important to periodically assess why one should hold a stock as it is to make the initial purchasing decision. If one views a decline in world growth as imminent and leading to a negative impact on iron ore prices, then Fortescue would be in the weakest position given its high debt levels.

Alternatively, Fortescue would be the preferred holding should such projected impacts be a year or more away. This is based on my prior assessment that it is starting to overcome some reservations about its debt levels, costs and less than conservative forecasts of prior years.

Motley Fool contributor Mark Woodruff does not own shares in any of the companies mentioned in this article.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »