The costs of major shocks to the global economy from natural and manmade threats could put at risk $1.17 trillion of the total projected GDP of the world’s major cities in 2017, according to the findings of a report compiled by the Cambridge Centre for Risk Studies (CCRS) at the Cambridge University Judge Business School.
Cautioning that a period of heightened risk lies ahead, the CCRS revealed its Global Risk Index of GDP@ Risk for 300 leading cities and expected losses from 22 different types of shocks is estimated to rise above a 10-year expected baseline of 1.48 percent of annual GDP to approximately 1.51 percent of the projected GDP of $77.7 trillion in 2017. And that number is expected to go up in the subsequent two years, 2018 and 2019.
The report blamed the increase in global risks on various forces, such as the growth in the world’s economy, which means “there is more output to be disrupted.”
“Secondly, geopolitical risks are increasing, technology risks are proliferating, and some types of financial crises are more likely now than they have been since the recovery from the Great Financial Crisis,” said the report titled “Cambridge Global Risk Outlook 2017.”
On a positive note, the report said certain types of threats are reducing, such as pandemic risk and banking crisis contagion, which are “being managed downward,” while violent political separatism is becoming less common.
At the same time, “natural catastrophes and climatic disasters are expected to continue to occur at their historical frequency,” the report noted.
CCRS identified three important emerging trends in the global risk landscape:
- Emerging economies will shoulder an increasing proportion of risk-related economic loss as a result of both their accelerating economic growth and their increasing risk environment. Therefore, their risk environment is less stable.
- There is a growing prominence of manmade risks.
- A heavy contribution is expected from new or emerging risks, such as cyber attacks and infrastructure vulnerabilities.
The report analyzes the global risk outlook for 2017 to the world’s economy from 22 threats in five broad categories:
- Finance, economics and trade risks, with the individual threats in this category listed as market crash, sovereign crisis and commodity prices.
- Geopolitics and security, with the threats listed as interstate conflict, terrorism, separatism conflict and social unrest.
- Natural catastrophe and climate, with the threats listed as earthquake, tropical windstorm, temperate windstorm, tsunami, flood, volcano, drought, freeze and heatwave.
- Technology and space, with the threats listed as nuclear accident, power outage, cyber attack and solar storm.
- Health and humanity, with the threats listed as human pandemic and plant disease.
The report explained that CCRS models shocks to the major economies of the world and estimates how likely they are to occur and how much output is at stake.
The study analyzed the risk to 300 of the world’s leading cities, which are responsible for half of global GDP. Economic shock models were developed for each of the 22 threats types, the report said.
“The economy of each city is analyzed by sector, size and demography, and the analysis estimates how much GDP output would be lost if each city were to experience different scenarios of shock for each threat,” it continued, noting that the study analyzes the loss of output as a measure of economic “flow.”
The report does not intend to predict the occurrence of crises and shock events, nor does it predict which cities will be hit by what types of events. “Each event is rare and unlikely. We analyze the small likelihood of each shock occurring and combine the chances of a rare catastrophe with its consequences to estimate the ‘expected loss’—the average probability-weighted amount of lost GDP…,” the CCRS report continued.
A CCRS representative described the Global Risk Index 2017 as “a new indicator to help businesses and policy makers measure their risk outlook over the next three years.”
CCRS produced a Global Risk Index analysis in 2014 in partnership with Lloyd’s as the 10-year outlook “Lloyd’s City Risk Index 2015-2024,” which was released in September 2015. In that analysis, CCRS estimated that 1.46 percent of global GDP was annually at risk over the next decade. The current report provides an update for 2017.
The CCRS’ research was supported by AIG, Lloyd’s, Munich Re, XL Catlin and Willis Towers Watson.