The global economic warning lights are flashing red
“Polycrisis”: That was it designation Jean-Claude Juncker outlined the challenges the EU faced in 2016 when he was President of the European Commission. Last week, the International Monetary Fund underscored how multiple clouds – including Europe’s energy crisis, rapid rate hikes and China’s slowdown – have gathered over the global economy. What seemed like separate crises, emerging from many different regions and markets, are now merging: we may be facing a poly-crisis on a global scale.
It is rare for so many engines of the global economy to shut down at once: countries that account for a third of them are poised to contract this year or next to the IMF. In fact, the outlook for the largest economies – the US, the eurozone and China – is bleak. With global inflation rates hitting their highest levels in 40 years, central banks have hiked interest rates with unprecedented synchronicity this year past five decadesand the US dollar is at its strongest since early 2000s. These forces are driving the bleak forecasts and creating new tensions.
Emerging economies have been hit with higher dollar-denominated debt burdens and disruptive capital outflows. Meanwhile, mortgage rates and corporate borrowing costs have skyrocketed around the world. Many stress indicators for financial markets are also flashing red as the rapid fall in interest rates from the lows seen during the pandemic has exposed vulnerabilities. Fire sale dynamics are a constant risk, as UK pension funds have recently shown.
The immediate causes of the global maelstrom are two historic shocks in quick succession: Covid-19 and Russia’s invasion of Ukraine. The Federal Reserve has been raising interest rates as quickly as possible since the early 1980s, when Paul Volcker was its chairman, to quell inflation, which was spurred in part by pandemic support and supply shortages. Meanwhile, Putin’s arming of natural gas flows means Europe is in for a huge terms-of-trade shock and China’s economy is suffering from its zero-Covid policy alongside a housing market crash. In fact, new diseases have emerged before the scars of the pandemic have even healed.
The multiple and mutually reinforcing shocks have presented policymakers with a difficult balancing act. For governments, efforts to boost growth and support households and businesses must avoid further fanning the inflationary fire and adding to debt burdens – already inflated by the pandemic – especially as borrowing costs are now rising. The higher interest rates rise, the greater the risks of a housing market crash and further financial market tensions. But for central bankers, insufficient tightening of monetary policy can lead to high inflation.
While there are no easy solutions, there are some lessons. Today’s fragile economy needs policies that are well calibrated and aligned with risks. The UK is an example of what not to do. His bull-in-a-china-shop approach over the past few weeks shows what happens when realities are ignored. Policy mistakes are partly why the IMF sees a one in four chance of global growth falling below the historically low 2 percent next year.
The contagion of global crises reinforces the need to build resilience. While the banking system strengthened after the financial crisis, policymakers did too little to strengthen the non-bank financial system. Many will also lament the lack of productivity-enhancing and anti-inflationary investment in skills, technology and alternatives to fossil fuels over the past decade when interest rates have been low. Without prudence and long-term thinking, the world economy will only continue to tumble from one crisis to the next.
https://www.ft.com/content/48d674a8-ae51-4f75-909c-0e5b6e38475c The global economic warning lights are flashing red