Global shocks

Global problems and shocks

The global economy faces a number of serious challenges in the 21st Century. Globalisation has benefitted most participants, but the increasing interconnectedness of the global economy has created a number of problems.

Short term problems

Some global problems are short term, such as the recent recession caused by the financial crash and related banking crisis. Most global shocks are relatively short term and may be self-correcting.  Other apparently short run events can have long lasting effects, such as the oil shocks of the 1970s, which permanently altered the global market for oil.

Longer term problems

Other global problems are longer term, and may require a strategic approach to finding solutions. These problems include global inequality and unequal economic development, global poverty, the exhaustion of non-renewable resources, depletion of the environment and global warming, and systemic problems associated with inadequate regulation of financial markets.

A significant problem resulting from globalisation is the increased risk to national economies from shocks over which they have little control. Globalisation means that economies are increasingly interconnected, and interdependent, and while this generates long term gains in terms of trade, growth and jobs, it also presents economies with risks and challenges.

One risk is that a shock originating in one part of the world, or in one industry or market, can quickly ripple across a country, a region, or the whole global economy, leaving economic turmoil in its wake. By their nature, shocks are often unexpected, but policies can be adopted which help to reduce the impact of shocks.

Types of shock:

1. Temporary shocks,  such as a terrorist attack, or a one-off change in a commodity price, like a rise in wheat prices, which quickly return to the ‘normal’, long run trend.
2. Permanent shocks,  such as an oil shock, which permanently alters the market for motor vehicles. Some economists argue that the financial crisis of 2008-09, and the resultant impact on the motor industry, will kick start a more carbon neutral approach to vehicle design.
3. Policy induced shocks,  such as reducing interest rates or increasing the money supply too quickly, creating an inflationary shock.
4. Asymmetric shocks, which are those affecting one region or one industry more severely than another. For example, the collapse of the Argentinean peso on the 1990s affected Spain more than the rest of Europe.
5. Symmetric shocks, which are shocks which affect all regions or industries in the same way.
6. Financial shocks, which are those starting in the financial markets, such as a sudden change in the exchange rate, or the collapse of a major credit bank. See also: Banking crisis.
7. Supply side shocks, which may be related to costs, such as a sudden increase in commodity prices, or related to changes in physical supply, such as labour strikes, or crop failures.
8. Demand side shocks, which are sudden changes affecting aggregate demand (AD), such as a collapse in consumer confidence leading to a fall in household spending, or a sudden fall in house prices creating a negative wealth effect.

In many cases, specific shocks can exhibit a number of these features.

Footnote: The impact of Brexit

Much of the impact of Brexit is likely to be relatively short-lived, and will include both positive and negative effects. The net balance between these effects will remain unknown, at least until negotiations are concluded and the final post-Brexit relationship between the UK and the EU is formalised. Even then, the longer-term impact will be uncertain, as this will depend upon the type of trade deals that can be struck by the UK and the rest of the World in the future. This, of course, assumes that the UK will not be a member of the European Custom’s Union and will be free to negotiate its own trade deals.