Last week, I discussed five long-term drivers of the world economy — demography, climate change, technological advance, the global spread of knowhow and economic growth itself. This week I will look at shocks, risks and fragilities. Together, I suggest, all these shape the economy in which we live.A “shock” is a realised risk. Risks, in turn, are almost all conceivable. In Donald Rumsfeld’s helpful phraseology they are “known unknowns”. But their likelihood and severity are unknown. We are surrounded by such risks — further pandemics, social instability, revolutions, wars (including civil wars), mega-terrorism, financial crises, collapses in economic growth, reversals in global economic integration, cyber-disruptions, extreme weather events, ecological collapses, huge earthquakes or eruptions by super-volcanoes. All of these are imaginable. The realisation of one raises the likelihood of at least some of the others. Moreover, known fragilities increase the likelihood or at least the likely severity of such shocks.

As the Global Risks Report 2024 from the World Economic Forum demonstrates, we live in just such a high-risk world. It is not so much that anything can happen. It is rather that a sizeable number of quite conceivable somethings might happen, possibly at much the same time. The recent past has shown this clearly: we have suffered a pandemic, albeit a relatively mild one by historical standards, two costly wars (in Ukraine and the Middle East), an unexpected surge in inflation and an associated “cost of living crisis”. Moreover, these disturbances followed not long after the multiple financial crises of 2007-15.

Not surprisingly, these shocks have proved damaging and destabilising. They are likely to impose long-term costs, especially on more vulnerable countries and people. But we can see a piece of good fortune: the inflation shock looks likely to fade relatively soon. Consensus forecasts for inflation in 2024 have changed very little since January 2023. In January 2024, they were 2.2 per cent for the eurozone, 2.6 per cent for the US and 2.7 per cent for the UK. Central bankers are mostly desperate to avoid the mistake of loosening too soon and so are far more likely to do so too late. Consensus forecasts for growth in 2024 are consequently low, but not negative, so far.