Growth in Stress

We propose a new global risk index, Growth-in-Stress (GiS), that measures the expected decrease in a country GDP growth as the global factors, which drive world growth, are subject to stressful conditions. Stress is measured as the 95% contours of the joint probability distribution of the factors. With GDP growth rates of a sample of 87 countries in the World Bank and International Monetary Fund databases and for the period 1985 to 2015, we extract three global factors: a first world growth factor driven mainly by all industrial and emerging countries; a second factor driven by “other developing” countries in Africa and America; and a third factor that is mostly related to East Asian economies. We find that the average GiS across industrialized, emerging and other developing countries has been going down from 1987. Post 2008 financial crisis, mainly from 2011 on, the world overall has fallen in a state-of-complacency with the average GiS falling quite dramatically to reach the lowest levels of risk (0-1% potential drop in growth) in 2015. However, the dispersion within groups is quite wide. It is the smallest among industrialized countries and the largest among emerging and other developing countries. We also measure the factor stress on different quantiles of the DGP growth distribution of each country. We calculate an Armageddon-type event as we seek to find the 5% GiS quantile under 95% extreme factor events and find that it can be as large as an annual 20% drop in growth.