Water is the biggest risk to the global economy

Amit Dave/Reuters

It doesn't take long to draw up some crisis that could damage the global economy.

China's slowdown, ever increasing emerging-market debt, political instability in the Middle East, and the breakup of the European Union all pose serious risks.

But none of those worries compare to the real danger, according to Joe Quinlan, strategist at Bank of America Merrill Lynch's US Trust.

He wrote (emphasis added):

They all represent known unknowns—or externalities already acknowledged and discounted by the capital markets. That's the good news. The bad news: None of the hazards just mentioned are as remotely as threatening to the global economy as water-related climate change risks, a dynamic little understood by investors.

Quinlan believes that climate change will decrease the supply of water available not only for human consumption, but also industrial use to dangerously low levels. Without water, which he calls the "lifeblood of the global economy," it will be impossible for economies to function, from the human toll to the simple fact that many industries are water-intensive.

He cited a World Bank report that lays out just how dire the situation is: 1.6 billion people could be subject to serious water scarcity within 20 years, while global water demand could shoot up as much as 50% by 2050. Industrial water demand could increase 50% to 70% by 2050, according to World Bank estimates.

India's difficult water situation over the past two years is the perfect example of this trend, according to Quinlan. Here's his breakdown (emphasis added):

None other than India, the newly anointed growth champion of the world economy, is in the grips of a two-year drought that threatens the economic livelihood of more than 300 million people. Because water levels in India's 91 reservoirs are at their lowest levels in decades, agricultural output has declined, while electricity generation has plummeted. Dams are parched, factories are operating below capacity, and the lack of safe drinking water has put the health of millions of people at risk. Water wars have erupted between states, making the crisis all that more acute for the national government. Add it all up and the world's strongest emerging market is being laid low by a climate-induced water crisis.

In order to alleviate these concerns, Quinlan said, governments and private firms will need to invest extensively in conservation and means to combat the global crisis, or risk it totally decimating growth.

According to Quinlan's estimates, the world water industry already generates around $450 billion a year, and that is poised to increase as the globe confronts this issue.

If that doesn't happen, there could be dire consequences.

Quinlan concluded:

Global climate change—or the increasing frequency and severity of droughts, floods and violent storms—has added another dangerous element and layer to the world's mounting water crisis. This slow-motion crisis of the past few decades is now accelerating, creating plenty of risks to global growth but also multiple investment opportunities.

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