China Slowdown, Asset Price Drop Pose Growing Threat, WEF Says

By Simon Kennedy and Brian Swint

Jan. 13 (Bloomberg) -- A slump in China and a collapse in international asset prices pose a growing threat to the global economy, according to a World Economic Forum report.

In a review of 10 risks, growth of less than 6 percent in China and a plunge in financial markets were cited as bigger threats than a year ago. A fiscal crisis as governments bloat budget deficits to bail out banks and fight a recession and emerging markets retreating from globalization were also cited as potential risks.

The outlook was published two weeks before bankers, politicians, central bankers and academics flock to the Swiss ski resort of Davos for the forum’s annual conference. They will gather this year as the financial crisis continues and the world economy faces its deepest slowdown since at least the 1980s.

“Given the vulnerable state of the global economy, and as deleveraging continues across the financial system, further shocks could have severe and far-reaching consequences,” Klaus Schwab, the forum’s founder and executive chairman, said in the report.

A slowdown in China, asset price slumps and fiscal crisis are “pivotal” risks because they have the potential to create other obstacles to the global economy’s recovery such as increased protectionism or volatile energy prices, the forum’s report said.

Risks Grow

Threats to the world economy are already building. Chinese central bank governor Zhou Xiaochuan said Jan. 12 that there are downside risks to the government’s 8 percent growth target for this year. Chinese exports fell for the first time in seven years in November, imports plunged and industrial output gained the least in almost a decade. Economic growth may slow to 7.5 percent this year, the World Bank estimates.

In the U.S., the Congressional Budget Office forecasts that the budget deficit will swell to at least $1.18 trillion this fiscal year. President-elect Barack Obama said Jan. 6 that he expects similar shortfalls “for years to come.”

The threats of a spike in energy prices and major decline in the dollar were lower than a year ago, the report said.

To contact the reporters on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net; Brian Swint in London at bswint@bloomberg.net.