Tag Archives: extreme weather

A Riskier World?

This year’s Davos gathering is likely to be dominated by Donald Trump’s presence. I look forward to seeing him barge past other political and industry leaders to get his prime photo opportunity. As US equity markets continue to make all time highs in an unrelentingly fashion, it is scary to see the melt-up market been cheered on by the vivacious talking heads.

Ahead of Davos, the latest World Economic Forum report on global risks was released today. 59% of the contributors to the annual global risks survey point to an increase in risks in 2018, with environmental and cybersecurity risks continuing their trend of growing prominence, as can be seen below.

click to enlarge

Undoubtedly, environmental risks are the biggest generational challenge we face and it is hard to argue with the statement that “we have been pushing our planet to the brink and the damage is becoming increasingly clear“. That said, what is also striking about these assessments (and its important to remember that they are not predictions) is how the economic risks (light blue squares) have, in the opinion of the contributors, receded as top risks in recent years. The report does state that although the “headline economic indicators suggest the world is finally getting back on track after the global crisis that erupted 10 years ago” there is “continuing underlying concerns”.  Amongst these concerns, the report highlights “potentially unsustainable asset prices, with the world now eight years into a bull run; elevated indebtedness, particularly in China; and continuing strains in the global financial system”.

A short article in the report entitled “Cognitive Bias and Risk Management” by Michele Wucker caught my attention. The article included the following:

Risk management starts with identifying and estimating the probability and impact of a given threat. We can then decide whether a risk falls within our tolerance limits and how to react to reduce the risk or at least our exposure to it. Time and again, however, individuals and organizations stumble during this process—for example, failing to respond to obvious but neglected high-impact “grey rhino” risks while scrambling to identify “black swan” events that, by definition, are not predictable.

and

One of the most pervasive cognitive blinders is the availability bias, which leads decision-makers to rely on examples and evidence that come immediately to mind. This draws people’s attention to emotionally salient events ahead of objectively more likely and impactful events.

I do wonder about cognitive blinders and grey rhinos for the year ahead.

Risky World

The latest World Economic Forum report on global risks is out today and, as usual, it reflects current concerns rather than offering any predictions for 2017. To be fair to WEF, the top risk for 2012 to 2014 inclusive in their survey was income disparity which is commonly viewed as one of the factors behind the rise in populism.

click to enlargewef-global-risks-2017

The report states the obvious about the impact on global risks following 2016, specifically that “societal polarization, income inequality and the inward orientation of countries are spilling over into real-world politics” and that “decision-making is increasingly influenced by emotions” due to the increase in nationalism. Where this year’s report is spot on, in my view, is in relation to the top 5 global trends that will determine global developments over the next 10 years, as below.

click to enlargewef-top-5-global-trends-2017

The report also states that “although anti-establishment politics tends to blame globalization for deteriorating domestic job prospects, evidence suggests that managing technological change is a more important challenge for labour markets” and that “we are in a highly disruptive phase of technological development, at a time of rising challenges to social cohesion and policy-makers’ legitimacy”.

Among the many risks highlighted in the report is a reduction in geopolitical co-operation which is likely to be detrimental to global growth, action on global indebtedness, and climate change.  It’s particularly depressing to think that even if the commitments under the Paris agreement were delivered, which now looks doomed after the election of Trump, the United Nations Environment Programme (UNEP) estimates the world will still warm by 3.0°C to 3.2°C, still far above the 2°C limit where scary and irreversible stuff happens.

Another worrying risk is the possibility of a new arms race in an era of rapid advancements in a technology which also has a retrograde feel, especially “while risks intersect and technologies develop quickly, too often our institutions for governing international security remain reactive and slow-moving”.

All pretty cheery stuff! And on it goes.

As I write this, I’m watching reports on Mr Trump’s press conference today, and although there is no doubt that our world is riskier as we enter 2017, it will be entertaining to see this guy as the leader of the free world. Hopefully good entertaining, not depressing entertaining!

Rating Risks

The latest World Economic Forum report on global risks reflects the common concerns of its almost 750 global contributors across multiple disciplines. Such reports are often poor predictors of issues (e.g. the emergence of the migrant issue in Europe) but do reflect current thinking as the graphic below on the changing risks by likelihood and impact illustrates.

click to enlargeWEF Global Risks 2007 to 2016

It’s interesting that China hasn’t made it onto either list since 2010. The report has the following to say about a slowing Chinese economy:

The government faces a dilemma. If it tightens credit conditions, it could reduce investment more quickly than consumption can increase to compensate, and cause massive defaults among struggling and heavily leveraged companies. This could mean a much more severe economic slowdown, potentially causing a surge in unemployment and social unrest. However, if the government lets more credit flow to avoid these destabilizing defaults, it risks further increasing the indebtedness of underperforming industries and creating bigger problems down the line.

Unsurprisingly, different regions in the world have different concerns and it’s interesting to compare and contrast each.

click to enlargeWEF Regional Perspective Top 3 Risks 2016

Climate change, extreme weather and water issues are ever present risks. At least it’s reassuring to see that the 5th IPCC assessment report (as per this post) does seem to have moved the debate on from whether we humans are impacted climate to the speed of implementing the mitigation and adaption actions required. As the WEF report states, the Paris Agreement reached last December is a positive step although “to date, nearly 190 governments have submitted their climate action plans, covering over 95% of total global emissions” and “these efforts alone will not suffice as even the most optimistic estimates suggest that these pledges taken together would contain warming only to 2.7°C above pre-industrial levels.” Over 2.0°C is commonly believed to be the point where things could get extremely unpredictable. The Paris Agreement is however better than previous efforts and therefore represent progress.