The end of the year is the time when financial analysts take out their crystal balls from the drawer and try to predict what is likely to happen in the coming year. They listen to what regulators, politicians and the financial media are saying and the supplement this with their hunches – hunches that may be influenced by their literary preferences. This time around there seem to be more analysts who prefer Charles Dickens’s Bleak House rather than Great Expectations.

Admittedly, financial journalists seem to get a frisson of excitement from worrying their readers. On the contrary, politicians prefer to indulge in magical thinking – a conviction that thinking is equivalent to doing. Let us steer away from these extremes and strike a balance and see what is in store for the world economy in the coming 12 months.

A man in a Santa Clause costume holding an anti-Brexit placard outside the Houses of Parliament in London, Britain. Photo: Peter Nicholls/Reuters

2018 was indeed not as good a year for investors. At the time of writing practically all financial asset indices are showing signs of sharp decline from what they were at the beginning of the year. An unprecedented decline in both bond and equity prices has left investors puzzled as to how best to avoid risk while getting a decent return. Keeping money under the mattress or in a bank savings account with practically no return may have been the choice of the ultra-cautious. They would certainly have less to worry about the erosion of their wealth in 2018.

European Central Bank president Mario Draghi gives four reasons why he worries about European and global economic performance in 2019. He is not the only one to fret about the resurgence of trade protectionism and political turbulence in Europe and some emerging market turmoil makes the Eurozone prone to vulnerability to shocks.

The main risk outlined in the ECB autumn Financial Stability Review is that “investors dump risky assets, which could lead to a disorderly drop in the value of stocks and bonds”. This dumping is already happening with major financial markets plagued with volatility and in correction territory. Losing 10 per cent of one’s investments in equities and bonds is not the best way to end the year.

Political problems within the EU are not helping at all. Italy’s populist government seems to be reconciling itself that the Growth and Stability Pact rules must not be ignored if the country hopes to continue to be a member of the EU. France’s Macron is beginning to realise that his honeymoon with the mercurial French electorate is long over. Economic reforms are easy to articulate in policy papers written by well-paid academics but notoriously difficult to implement when a large section of society is caught in a poverty trap by the high cost of living, low wages and poor public services.

The problems surrounding Brexit will continue; whether it will be an amicable divorce or an acrimonious one, both the UK and the EU will have to improvise and be creative to avoid severe economic consequences in 2019. The formation of the next European Parliament will probably make the already jittery EU governance more of a risk for further social and economic reform.

Political problems within the EU are not helping at all

While the US economy is in the best shape at the moment, the saying that the US could pull other economies out of trouble is no longer so true. Paul Diggle, the economist at Aberdeen Standard Investments, believes that the ECB list of four risks is not exhaustive.

He argues: “The ECB hasn’t yet grasped the extent of the Eurozone economic slowdown, amid an increasingly challenging global economic outlook.”

The ECB may indeed be aware of this fifth risk. It has decided to stop buying sovereign and corporate bonds to ease pressure on the capital market but has committed itself to keep interest rates low at least until next summer. The “will do what it takes” mindset of Draghi will probably persist even after he leaves office in late 2019.

The IMF that missed the onset of the great recession in 2008 is now warning that the world economy is “vulnerable to a sudden tightening of financial conditions”. Should we worry about this bleak warning for 2019 especially on Christmas Eve? Are regulators genuinely anxious or are they covering their backs?

Being sure is hard. One thing is certain: there are enough bleak signs that sooner or later the global economy will be afflicted with a recession in various zones. Whether in 2019 we will experience just slowing growth or a full-blown recession remains unknown.

johncassarwhite@yahoo.com