The global economy needs to brace for a perfect storm without a captain aboard
Apolycrisis, according to economic historian Adam Tooze, is a situation in which one faces multiple crises and the whole is even more dangerous than the sum of the parts. It is hard to find a more accurate description of the challenges facing the global economy at present.
The International Monetary Fund (IMF) clarified recently just how gloomy the outlook is. The European energy crisis, multiple interest rate rises and structural economic problems in China are all now coalescing. Furthermore, the contrasts with the last time that the outlook was comparatively grim, 2008, are stark.
First, it is rare for nearly all parts of the global economy to be stalling simultaneously. The IMF estimates that roughly half of the global economy will be entering recession either this year or next.
Prospects for the world’s largest economies – the US, the Eurozone and China – are all bleak, if for slightly differing yet interconnected reasons.
In 2008, the developed world could look to China to embark on the largest fiscal binge in history. Now, saddled with mountains of debt after those years of gluttony, it has no fiscal space left to breathe.
Inflation is at its highest for 40 years. It makes life much harder for central banks, which are now hiking interest rates with a synchronicity and aggression not seen for half a century.
Unlike 2008, when the causes of the credit crunch and ensuing recession were the topic of a frenzied academic debate, the causes of this maelstrom are obvious: the Covid-19 pandemic and Russia’s invasion of Ukraine. But that is not to say the cure will be straightforward. Indeed, with China now suffering a debt and housing crisis, it is clear that new ailments are already surfacing.
However, on rereading Tooze’s magisterial account of the 2008 financial crisis and great recession that followed, Crashed, the most glaring difference this time around is the singular lack of a coordinated global response. In 2009, we had the G20 summit hosted by Gordon Brown in London to hammer out a set of shared solutions. Now, by contrast, there is total chaos. It almost feels like a Hobbesian “war of all against all”.
The epicentre of the inflation crisis, the US, is hellbent on getting prices down, with the Federal Reserve raising interest rates at unprecedented rates, thereby driving up the value of the dollar and crushing all other currencies. This is ruinous for energy importers and those who have borrowed in the greenback.
Recently, economist Ruchir Sharma implored in the Financial Times that the US should “act now to control the wrecking ball US dollar”. Except, of course, it will not – because it doesn’t care. A strong dollar is possibly the one thing it has in its favour to get on top of breakneck inflation.
This disorder has been all too evident. In Vienna on 5 October, Opec+ announced it had decided to cut oil production to maximise revenues, thereby driving energy prices higher and further turning the screw on energy importers.
On 16 October, at the annual Chinese Communist Party conference, President Xi Jinping signalled his intention to steer the world’s rising superpower away from reconciliation with the West, as he warned of “grave international developments” not seen in the past 100 years.
Finally, we need not elaborate on Russia’s declaration of war on the entire world order, a vaingloriously existential struggle.
It is self-evident, therefore, why the IMF is so bleak. However, it is a strange twist of irony that the problems most specifically affecting South Africa – crumbling infrastructure, interminable power cuts and a permanently striking labour force – are of its own creation.
The challenges facing the global economy will not last forever. The recession may be brutal and prolonged, but at some point growth will return. South Africans can only hope there will be enough of a domestic economy left to take advantage of it.
The challenges facing the global economy will not last forever. The recession
may be brutal and prolonged, but at some point growth will return. South Africans can only hope there will be enough
of a domestic economy left to take advantage of it
Natale Labia is chief economist of a global investment firm, and writes in his personal capacity.