Vanguard leaders discuss the main systemic risks facing the global economy

Jonathan Lemco of Vanguard Investment Strategy Group and Vanguard Chief European Economist Peter Westaway discuss the main systemic risks facing the global economy.


Rebecca Katz: So our first question is from Daniel in Fort Collins, Colorado. Thank you, Daniel. And he asks, “What are the main systemic risks to the global economy and what can investors do to mitigate that risk?” I know you both have some things to say on this so, Jonathan, why don’t we start with you.

Jonathan Lemco: The first thing I would say that’s pertinent just to this week, of course, is the Brexit. And that’s all I’m going to say about it because I think Peter is a real expert on this particular topic, but it’s moving markets this week. Let me stress this and Friday will be a very big day in our markets no matter what the result is. If I were to rank order, after the Brexit, I think at present I would say the continued slowdown in China. China’s growth is somewhere in the vicinity of let’s say 5.5% or so. At least that’s what they claim it is and that’s what the IMF believes. But the reason this matters is, one, China is the second-largest economy in the world. And in the event of a continued slowdown, this remains problematic for emerging markets around the world. China buys commodities from countries throughout Latin America, Southeast Asia, Africa, and indeed developed economies like Australia and Canada too. And so as China slows that is problematic for many of these countries that sell commodities to that country. Now China at 5.5, 6% growth is still, along with Indonesia and India, possibly the fastest growing country in the world. It’s just that we got used to year after year in China of 10% plus, 10%. Such that after, frankly, in the last 15, 20 years, we’ve had approximately 400 million Chinese people elevated from the poverty levels to the lower middle classes because of this ongoing tremendous growth. Now the country is going through a restructuring. It’s moving from an export-driven economy to a more domestic and consumer-driven economy and in the midst of hundreds and hundreds of reform, some of which have already passed, many of which have yet to come. This is a bit of upheaval for the world and so it’s very concerning, particularly for those of us who follow emerging markets. So I would suggest that this, at the moment, would be the second-biggest risk.

Peter Westaway: Can I just add something?

Jonathan Lemco: Sure.

Peter Westaway: To me the fact that Chinese growth is going to slow is completely as we’d expect for an emerging market that’s gradually catching up. But I think the risk that you’re highlighting is the possibility that that slowdown may be a more accelerated one. I mean people have talked about a hard landing for some time, and I think that that’s really the essence of it.

Jonathan Lemco: It’s the fear.

Peter Westaway: Isn’t it? Yes.

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