WEF: The world economy can not 'face major new shocks'

The global economy is "in no position to face major new shocks", according to the World Economic Forum (WEF).

Its Global Risks 2011 report warns that economic imbalances, volatile commodity prices and currencies, and governments' budget shortfalls are "unsustainable".

Rapid population growth is another risk, pushing up demand for food, water and energy by 30-50% by 2030.

The WEF warns that there is no sign of governments agreeing on how to achieve sustainable economic growth worldwide.

The Global Risks report was published in the run-up to the forum's annual meeting in Davos at the end of January, which normally attracts more than 2,000 of the world's top business and political leaders.

Clusters of risk

The report identifies three clusters of risk: the world economy, suffering in the aftermath of the financial crisis and weakened by budget deficits and the cost of ageing populations; the illegal economy driven by corruption, organised crime, illicit trade and failed states; and the every growing demand for resources such as water, food and energy.

The authors, drawn from a global network of business and political leaders, try to map how a single problem in each cluster can quickly escalate and cause a wider crisis affecting other areas.

Robert Greenhill, chief business officer at the WEF, said that while it had taken months for the Wall Street crash of 1929 to affect the rest of the world, it took only minutes for the crash of 2008 to make an impact.

The report speaks of "rapid contagion through increasingly connected systems and the threat of disastrous impacts" on fragmented societies where economic imbalances undermine social cohesion.

With economies weakened by the global financial crisis and government budgets strained by the cost of supporting rapidly ageing populations, "both governments and societies are less able than ever to cope with global challenges," both man-made and natural disasters.

The WEF report, one of the gloomiest in recent years, warns that while nationalism is on the rise, there is also a "growing divergence of opinion between countries on how to promote sustainable, inclusive growth".

The G20 group of leading nations, Mr Greenhill said, had shown "an extraordinary ability to come together in a crisis". But he questioned whether the group would be "able to come together and identify and address a crisis before it happens".

John Drzik, chief executive of consulting group Oliver Wyman and one of the report's contributors, pointed to the volatility of commodity prices as a key threat to both companies and consumers.

The price of coffee was up 77%, corn up 52%, cotton up 84% and palladium up 97% in recent years, with "speculators bringing even more price volatility into the system".

The rapid growth of the world's population, he said, would increase the demand for food by 50%, for water by 30% and energy by 40% during the next two decades.

However, Mr Greenhill also stressed that it was not all gloom. Countries and companies that understood the risks, and came up with solutions to cope with the crisis, would be able to unlock "global opportunities".

By Tim Weber

Source: http://www.bbc.co.uk