By Graham Vanbergen: When we were into the global pandemic by about a year, which was already causing mayhem across the world, I started to warn that the fracturing of the global order was more than the structured relationships between countries on an international level – and that economies would drive huge change. And once that change has started, the world would change forever as economic shocks reverberated around the world.
In the UK, a deep recession is on the way – that much is evident. And after four months of declining economic activity, it is patently obvious that not only is this a fact but that this recession could stay for a lot longer than many predict.
But there is some solace in knowing that whilst Britain might well be one of the first into harder times, it will be followed by much of the rest of the world sooner or later. The world economy is slowly grinding to a halt.
The reality is rather simple. If it’s not one thing dragging us down, it’s another. The fragility of debt-laden countries means that there are less in the way of economic tools to combat any downturns. Central bank tightening is already having an effect and supply chain issues and geopolitical tensions within them are all adding to a perfect economic storm. Growth – the holy grail of the West is soon to be replaced with falls in economic activity – driving down standards of living.
And as people prepare to tighten their belts for this perfect storm – it becomes a self-fulfilling prophesy event. Right now, insufficient supply caused by the pandemic – will soon be replaced by a fall in economic demand. The rise in global inflation caused by Putin’s aggression is ending what felt like limitless financial liquidity – and markets are now jittery. I say ‘jittery’ – I mean truly spooked. And by spooked I mean $9trillion lost in stock market values this year in America alone with insolvencies up 15 per cent globally this year and 19 per cent next year. Crypto-currencies have lost $2 trillion in 2022.
The result is country-to-country shocks that have knock-on effects and they will keep do so for some time. They, in turn, will drive more economic paranoia leading to less confidence and continued shocks to individual economies around the world – a bit like a slow-motion domino effect.
Predictions of economic turmoil are starting to emerge from the International Monetary Fund to the Institute of International Finance.
Top economist Dr Mohamed El-Erian is President of Queens’ College, Cambridge University. He serves as Chief Economic Advisor at Allianz and recently wrote in a Foreign Affairs op-ed:
“These shifts help explain many of the unusual economic developments of the last few years, and they are likely to drive even more uncertainty in the future as shocks grow more frequent and more violent,” he added. “These changes will affect individuals, companies, and governments – economically, socially, and politically.”
An example of the interconnectedness of these shocks can be seen by the 2008 financial crisis. It had different effects on different countries that led to changes in geopolitical alliances. The rise of right-wing populism is a direct consequence of this financial meltdown event. America and Britain got Trump and Brexit. Internationl relationship were severly strained because of them. The same can be said with different consequences of the global pandemic and Putin’s war in Ukraine.
Rate hikes have been different all over the world and have different effects. It has led to vulnerabilities within economies becoming visible. Confidence drained and $trillions vapourised in a matter of weeks, evidenced by the the aforementioned stock market dive, crypto-crash and escalating insolvency rates.
What we are facing is no longer what economists predict – a simple recession. These same people got it wrong with all of the (economic) events in the last forty years – that’s why they happened in the first place. The difference is that now, those vulnerabilities are much bigger than we’ve been led to believe.
In Britain, the general public was told that there was no money tree in 2017. But then the pandemic came along. The amount subsequently spent between those two points was about £400 billion in terms of debt to GDP. And because of ‘Trussonomics’, we now know we are on that limit because the markets reacted in such a way that the signals were all flashing red. Therefore, no government can extend this debt-to-GDP ratio without offering to the markets exactly how it will get paid back. In other words – Britain has definitely maxed out its credit card for the first time because confidence is lost.
This means high levels of taxation for decades to come. It also means there is little manoeuvre for governments of the future to invest more in say public health or education without being able to prove a return on capital. This means a slump on everything is coming.
Governments, corporations, small and medium-sized enterprises along with individuals will experience these econmic shocks. It will be a 360-degree slump, which will last for years. It will likely drive more political instability just as the bank-led financial crisis has done (and still is). In Britain, the failure of Brexit as a political ideology that actually had no economic plan – will soon turn into anger against those who promoted it. Public outrage is will vere away from what was anticipated. This is always dangerous – but dangerous times are coming.