This report presents a narrative of how global inflationary pressure over several years impacts the world economy and financial markets.
The research provides a basis for a global enterprise to test its operational and strategic model, as a step toward improving its resilience. Scenarios more generally can be used to cover the spectrum of extreme shocks, such as those proposed in the Cambridge Taxonomy of Threats, which encompasses five classes of business risk.
- We use the Global Economic Model (GEM), Oxford Economics’ quarterly-linked international economic model, to better understand how the High Inflation World scenario impacts the global economy.
- We do this by estimating the loss in global gross domestic product, cumulated over a five year period, termed “GDP@Risk”. For this scenario, GDP@Risk, expressed in real terms in US dollars, ranges from a loss of $US4.9 trillion for in the least extreme scenario variant and 4US10.9 trillion in the most extreme.
- However this scenario does not necessarily lead to a global recession, but instead slows down economic growth considerably. These impacts are significant but not of the same scale as the Great Financial Crisis, from 2008-2012, whose GDP@Risk is around $20 trillion (2015 dollar estimate).
- Best and worst performances (within equities) are the UK (FTSE100) and Japan (N225); within fixed income, US and Japanese bonds, with the worst performing portfolio being high fixed income.
- For portfolio protection it is recommended equity allocation is shifted away from Japan towards UK and away from Japan fixed income towards US fixed income.