5 soft spots in the global economy

2015 has barely begun and there are already some worrying signs emerging about the global growth outlook and stock prices.

Like last year, geopolitical risk remains a concern as this week’s tragic terrorist attack in Paris underscores.

In purely economic terms, the only major market in decent shape is the U.S., but even that recovery is at risk if the rest of the world economy sputters.

Eurozone-risk-deflation

Here’s an overview of the 5 major risks.

Eurozone

It’s official. The region is suffering from deflation or falling prices for consumer goods, which can depress economic growth overall if prolonged.

Consumer prices in December fell 0.2% year-on-year. True, the decline in energy prices is a big part of this and that could change.

Even so, the bad data point adds pressure on the European Central Bank (ECB) to launch a new bond-buying program at its next meeting on January 22  to support regional economies.

Greece, meanwhile, is in the midst of an election drama that could result in a new government willing to dump the euro to give the debt-burdened Greek economy a chance to recover.

China

In recent years, China’s high-speed economy has carried the global economy. No more: China is growing at its slowest pace since 1990.

This dragon is slowing down. China will be lucky to meet its 2014 growth target of 7.4% when the final numbers come in for 2014.

For 2015, the People’s Bank of China, the nation’s central bank, expects the the economy to decelerate 7.1% as a slowdown in real estate investment continues.

Even worse, the International Monetary Fund (IMF) predicts the Chinese economy will decline over the next five years, from about7.4% this year to 6.3% by the end of the decade.

That’s still an impressive number, but not for China.

Consider that from 1980 to 2012, China averaged growth of about 10% annually.

The downturn will be felt in economies worldwide that have benefitted in the past from the Chinese growth miracle over the last two decades and investors will need to search harder for smart China plays.

Japan

The world’s No. 3 economy fell into recession in November thanks to an ill-timed sales tax increase back in April.

Prime Minister Shinzo Abe and his Liberal Democratic Party easily won a snap election last month, but time is running out on Abenomics, the three-pronged economic program of ultra-loose monetary policy, fiscal stimulus and regulatory reform.

The Bank of Japan has done its part by expanding its purchases of government bonds, real estate investment trusts and other assets.

Abe’s government is also readying a new $30 billion fiscal package.

However, Abe’s efforts to deregulate Japan’s antiquated farm sector, strict labor policies and open up the economy to more competition by joining a US-led trade deal have gone nowhere.

It’s hard to see a sustained recovery in Japan without reform.

Oil

The collapse in energy prices is great for consumers and the airline industry.

However, the downturn that has taken oil prices down to five-and-one-half year lows isn’t doing wonders for the stock market.

Energy stocks are getting crushed.

And the earnings on average of companies on the S&P 500 Index may be as much as $6 a share lower than originally forecast if oil remains below $50 a barrel, according to projections by Bank of America strategies Savita Subramanian and Dan Suzuki.

The weak start in the U.S. stock market owes much to the oil price declines.

Terrorism

Recent terrorist attacks in Paris and Sydney are a reminder that political violence is no longer just a problem in the Middle East and South Asia.

If terrorist groups stage spectacular attacks with regular frequency in developed economies in the West, investor sentiment may suffer.

That would also raise the odds of increased military activity by Western forces in the energy rich Middle East.

Takeaway

Nobody can predict the future and perhaps these risks factors will prove less worrying as the year unfolds,

It’s also important to place these negatives in the bigger picture.

The IMF forecasts global growth to average 3.3%  in 2014―unchanged from 2013―and to rise to 3.8% in 2015.

That said, it might be wise to take to a financial adviser about how much your portfolio is exposed to the global economy’s weakest links.

Continued Learning: 7 ways to prosper from the China slowdown

Photo Credit: Guilio Nepi via Flickr Creative Commons