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Economic Insight: Big bang?

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Financial markets and systemic political change

Allianz SE
Munich, Jul 20, 2017

There has been a noticeable increase in destabilizing political events in recent years. This begs the question whether we are dealing with an unfortunate accumulation of political accidents, or whether there is something systemic going on.

Several underlying trends, such as global power shifts, weakening in-stitutions, the move to hybrid conflicts and deepening economic and social divisions suggest the latter.

Economists and investors might want to start preparing for a pro-longed period of political instability. Politics might have to be given a more prominent place in economic and financial market forecasting.

Even under more stable framework conditions, forecasting political risk is an art not a science. In a world of systemic change and growing interlinkages, the range of plausible scenarios becomes larger still. Complexity and uncertainty complicate the analysis of political risks and its economic and investment implications. Elaborate, data-intensive models might not be the best solution. We suggest some guidelines that might help to close the gap.