2008 was an historic year. Financial disruptions triggered by declining house prices in the US grew into a global credit crisis of systemic proportions. By the second half of the year, most advanced economies had entered a recession. The downturn spilled over into emerging markets, increasing the likelihood of a global contraction in 2009. Although the world has seen several financial crises, this one differs in two respects. First, it has demonstrated just how tightly interconnected globalization has made the world and its systems. Second, this crisis was driven by developed economies using unprecedented levels of debt and leverage throughout the financial system. Thus, risks that had been identified in the past two editions of this report - the risk of a global meltdown in asset prices (2007) and the widespread mispricing of risk and the potential implications of systemic financial risk (2008) - have materialized with huge consequences.
The focus of the report
This year’s report focuses on the effects of the global financial crisis and its implications for those risks that came to the fore of the Global Risk Network assessment for 2009. They include: a sudden further drop in China’s growth to 6% or below; deteriorating fiscal positions; further asset price falls; increasing resource-related risks due to climate change; and the failure of global governance to mitigate global risks. The highly interconnected nature of these risks means that their impact is truly global. The economic outlook for 2009 is a grim one for most economies; markets remain volatile, liquidity has not returned, unemployment is rising, and consumer and business confidence has fallen to record lows. In this climate, risks become even more potent in their impact and, as discussed in previous reports, the tendency towards panic and short-term responses are more pronounced. This report explores the dangers of managing out of this crisis, without considering the broader, long-term consequences of today’s decisions. It also stresses the need for a determined, global focus on balancing the response to the immediate challenges with a concerted effort to mitigate longer term risks, not least those relating to climate change and resources.
The report also considers the impact of the financial crisis and economic environment on a few risks introduced for the first time in 2008 and others that the Global Risk Network has tracked for several years. Many of these are particularly pertinent to the current environment. Linking to the discussion on the response to the financial crisis, the risk of over-regulation and lack of a coordinated approach to regulation at a global level makes its first appearance in the assessment. The same is true of underinvestment in infrastructure, a risk that is highly interconnected with a number of economic, environmental and societal risks. In terms of both economic impact and loss of life, health risks, including chronic and infectious diseases, as well as the ongoing risk of a major pandemic, continue to dominate. Conflicts, in particular intra-state conflict, and terrorism continue to mar the lives of millions worldwide and their effects reach far beyond the costs to the populations they directly touch.
Global Risks 2009 offers an assessment of how the focus risks interconnect with others and how they may evolve over time. It also raises many questions about the risk of ignoring other potential crises when dealing with a current one. The events of 2008 underscored the importance of two major ideas behind the work of the Global Risk Network: global risks can only be understood when explored in the context of their interlinkages with other risks and no one group acting alone can mitigate them effectively. These aspects of global risks are also why they pose such a challenge for policy-makers and business leaders alike. However, as they try to resolve this situation as quickly as possible, leaders must be mindful of the long-term implications of today’s decisions.