This report is part of the Centre for Risk Studies’ suite of stress test scenario reports, developed to explore management processes for dealing with an extreme shock. It is not a prediction.
Overview
The scenario quantifies the effects of a conflict catastrophe, where Japan and China carry out military strikes on each other, without provoking the military involvement of their allies. This clash follows an escalation of tensions over several months and is eventually ended by international intervention led by Russia and the United States.
A period of ‘Long Peace’ has dominated since the Second World War. During this period, it is difficult to imagine a major conflict breaking out. Surveys of people’s risk perception suggest that the threat of interstate conflict is underestimated. Therefore, in this report a review of political science and conflict studies is used to identify a category of conflict that is plausible for modern political conditions, but severe enough to challenge assumptions about the status quo.
Key findings
- The world’s economy suffers from the shock waves of the conflict. Exports from China and Japan to other countries are severely reduced, along with their imports.
- The conflict triggers a global recession, which persists over several years. The overall effect is measured in lost GDP output over five years, ranging from $17 to $34 trillion, depending on the scenario variant in question.
- The market impact of this scenario results in a standardised high-quality, low-risk portfolio seeing returns that are 20-50% worse than expected for 2.5 to seven years. US, UK and Eurozone assets are associated with most of the losses.