The global economy is the perfect example of a complex system. Billions of different inputs all working together combine to make the world economy function. Each person contributing to global growth or global output adds via their own speciality, and every speciality has its place in the world.

With so many trillions of actions and transactions going on around the world, it’s impossible for anyone to accurately predict what the future holds for the global economy, based on just a few data points. However, Deutsche Bank’s global economics analysts have come up with a few rules of thumb for the global economy, which could help analysts and investors decode some of the madness out there.

What factors could trip up global growth?

Deutsche Bank’s chief global economists employ a global VAR (vector autoregression) model to derive a set of global “rules of thumb” for how real GDP in individual countries and the globe as a whole respond to various shocks. The analysts acknowledge this will never arrive at an accurate figure, but it’s helpful for estimating how certain factors can have a knock-on effect on growth around the world.

The four main “rules of thumb” the economists have looked at are possibly the most talked about economic events the year. First of all, there’s the effect a Fed rate hike will have on the markets and global economy. The figures estimate that an unexpected 25 bps Fed rate hike will reduce global real GDP by around 0.4% after two years – while that may seem small for a global ecnonomy of $70 trillion or so it is a lot of money. The impact is likely to be most severely felt within the United States, with Europe and Japan getting away fairly unscathed.

The second major economic event is a larger move in oil prices. In this case, Deutsche’s analysts define a large move as a 10% rise. While some economists have claimed that the falling oil price is to blame for sluggish economic growth around the world, Deutsche isn’t convinced. In fact, the bank’s model argues that global real GDP will be largely unaffected on balance by a 10% rise in oil prices. Exporters will lose out, but importers will profit.

What factors could trip up global growth?
What factors could trip up global growth?

A significant equity sell-off, which is defined by a one standard deviation (6%) decline in equity prices will result in a 0.5% fall in global output according to Deutsche’s model. Most major developed market economies will experience a drop in output of around one-half a percentage point.

The final “rule of thumb” is related to China. Specifically, Deutsche’s economists predict that a 1% fall in China real GDP will take a 0.5% off world GDP excluding China after two years. Another interesting revelation is that Deutsche’s analysts find a 10% depreciation in China FX will have less than half the effect of a growth slowdown on global real GDP.

If all these negative events were to take place at the same time, it is not too difficult to see global growth slowed by a full percentage point. Although combined favorable shocks in the opposite direction would yield a similar upside to global growth.