The global economic warning lights are flashing red

“Polycrisis”: This was a description Jean-Claude Juncker gave the series of challenges facing the European Union in 2016, when he was President of the European Commission. The International Monetary Fund last week emphasized how multiple clouds – including the European energy crisis, rapid rise in interest rates and a Chinese slowdown – are gathering on top of the global economy. What seemed like separate crises originating from many different regions and markets are now merging: we may face a multiple crisis on a global scale.

It is rare for so many engines of the global economy to fail at once: Countries that account for a third of that economy are preparing for a downturn this year or next, accordingly. to the International Monetary Fund. Indeed, its outlook for the largest economies – the US, the eurozone and China – looks bleak. With global inflation touching 40-year highs, central banks have raised interest rates this year with a synchronicity not seen in the past. past five decadesThe US dollar hit its strongest level since early 2000s. These forces drive bleak expectations and create new breeds.

Emerging economies have suffered from high dollar debt burdens and disrupted capital outflows. Meanwhile, mortgage rates and corporate borrowing costs have risen around the world. Many financial market stress gauges are also red flashThe rapid decline in rates from their lowest levels during the pandemic has exposed weaknesses. The dynamics of selling with fire is an ongoing risk, as UK pension funds have recently demonstrated.

The immediate causes of global turmoil are two historical shocks in quick succession: COVID-19 and Russia’s invasion of Ukraine. The Federal Reserve has raised interest rates at the most rapid pace since the early 1980s, when Paul Volcker was its chair, to crush inflation caused in part by pandemic support and supply bottlenecks. Meanwhile, Putin’s use of natural gas flows as a weapon means that Europe is going through a huge phase Shock terms of tradeChina’s economy is suffering under its COVID-free policy, along with a Real estate market crash. In fact, new diseases appeared before the scars of the epidemic had healed.

Multiple and mutually reinforcing shocks have left policymakers with a difficult balancing act. For governments, efforts to boost growth and support households and businesses need to avoid putting more fuel on the inflation fire and increasing debt burdens — already heightened by the pandemic — especially with borrowing costs now rising. The higher the interest rates, the greater the risks of a housing market crash and the greater the financial market pressures. However, for central bankers, not tightening monetary policy enough could lead to higher inflation.

While there are no simple solutions, there are some lessons. Today’s fragile economy needs politics to be calculated and attuned to risks. The UK is an example of how not to do this. The approach of the bull shop in China in recent weeks shows what is happening and when Facts are ignored. Policy mistakes are partly why the International Monetary Fund sees a one-in-four chance of global growth next year below the historically low level of 2 per cent.

The contagious impact of global crises increases the need to build resilience. While the banking system was strengthened after the financial crisis, policy makers did little to strengthen the non-bank financial system. Many will also lament the lack of productivity-enhancing, anti-inflationary investments in skills, technology, and alternatives to fossil fuels over the past decade, when interest rates were low. Without wisdom and long-term thinking, the global economy will continue to teeter from one crisis to the next.

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