So-called black-swan events are by definition highly improbable. But that hasn’t stopped the economists at Société Générale from attempting to identify a few scenarios that could blindside the market.
In its ‘Global Economic Outlook’ report released on Monday, SocGen listed six such unlikely events that pose the biggest threats. Those include a hard economic landing in China and the possibility of a referendum in the U.K. on whether to remain in the European Union.
The term “black swan” was popularized by Nassim Nicholas Taleb in his 2010 best-selling book to describe an event that, although highly improbable, has major consequences.
For SocGen, China’s potential economic slowdown promises major consequences.
“In our view, a hard-landing scenario is one whereby the official, full-year, real GDP growth rate plummets below 5% in 2015. Anything short of 5% would severely destabilize the job market and increase systemic financial risk,” economist Wei Yao said in the report.
SocGen sees the probability of a hard landing for China’s economy at 30%.
The bank also sees any move in the U.K. to hold a vote for a so-called Brexit, or British exit from the European Union, as threatening to destabilize markets.
“A serious (25%) risk is that the Conservatives win and win well enough to form a government able to deliver the Brexit referendum they have promised by the end of 2017,” said Brian Hilliard economist at SocGen.
SocGen’s researchers also outlined six investment scenarios that, arguably, may be more likely than black swans and that may drive markets in the near term.
The impact of oil price, interest rates, and currency rates on the economy is lower than in the past but still positive.
Job creation and improving wages will result in gains in household incomes while the negative impact from lower oil prices has been muted.
The Federal Reserve is expected to raise interest rates in June and asset purchases in the eurozone will continue after September 2016.
There will be a slow and gradual exit from “exceptionally low” bond yields.
Emerging markets may suffer when the Fed hikes interest rates but there are mitigating factors. “The dark side of dollar debt is light gray rather than black.”
The eurozone is bouncing back. “Absent exogenous risks, there seems to be little in the domestic euro area economy in 2015 that would trigger a new sharp downturn.”