A crisis initially limited to a Lego theme park ended up hitting the entire economy of South Korea. It happened in early fall. The company that promotes the leisure center, in which the government of the province of Gangwon participates, left a bond of 137 million euros unpaid. The decision not only put the project on the ropes. In a market with less liquidity due to rate hikes, the arteries through which credit to companies circulates were frozen and the Government and the Central Bank of Korea were forced to intervene.
The non-payment Legoland has been, at least for now, a scare. Another one. Almost parallel to that crisis, the City of London was plunged into chaos after former Prime Minister Liz Truss revealed her plans to cut taxes. The turmoil in the United Kingdom, which also required the intervention of the Bank of England, once again highlighted the fragility of the global economy.
In the postcovid era there are several latent threats. And the combination of two or three shocks may put financial stability at risk. In the United Kingdom, mistrust of the markets, less liquidity and the magnitude of shadow banking came together. “Welcome to the world of polycrisis”, wrote historian Adam Tooze of Columbia University recently in the Financial Timesrecovering a term used by the former president of the European Commission, Jean-Claude Juncker.
The most repeated word in all the forecasts formulated by international organizations is uncertainty. It appears on five occasions in the forecasts of the European Commission, 30 times in those of the International Monetary Fund (IMF) and up to 96 in those of the OECD. Following the post-pandemic rebound, projections point to the economy cooling off again. The latest, from the OECD, indicate that the world will grow by 2.2% in 2023, compared to 3.1% this year. The slowdown will be felt above all in the United States and Europe, whose economies are expected to advance just 0.5%. The crisis, on this occasion, is based on several phenomena. Some are visible and others latent; some are easing and others gain intensity. And the danger is that some continue to interact with others.
Inflation. It stands as the main enemy of international institutions. “The number one priority continues to be the fight against inflation. We will not be able to sustain economic growth without restoring price stability,” says Daniel Leigh, director of the IMF’s World Economic Studies Division. Despite the fact that both in the US (7.7%) and in Europe (10%) the rise in prices moderated in November, the level reached is still very high. The chief economist of the European Central Bank (ECB), Philip Lane, said this week that the “peak” could be near, but also warned that prices will remain high in 2023 and 2024. Markets expect the inflationary escalation to moderate and central banks soften the rise in interest rates, which could even unleash another threat to the economy: recession.
Recession. Autumn has turned out to be less gray than expected on both sides of the Atlantic, but forecasts continue to point to a slowdown in the economy for 2022. Even a technical recession for the euro zone. This week, the OECD warned that leading indicators for most advanced economies reflected a loss of momentum in activity. “We expect to see several different shades of recession in 2023,” says Carsten Brzeski, global head of Macro at ING. That, he adds, translates into a “manual” depression in the US caused by the Federal Reserve to cool the economy and a milder one in the euro zone. The objective seems to be clear: to avoid at all costs the stagflation.
Climate and energy crisis. Carsten Brzeski believes that Europe could enter a recession due to the “structural challenges and transitions” it must face. The EU intends to step on the accelerator to gradually abandon fossil fuels given the high cost of dependence on Russian gas. According to the OECD, energy spending is equivalent to 17.7% of GDP, a level never seen since the two oil crises. That invoice is what has spurred the inflation rate to levels that the euro had never experienced. International organizations warn of another danger derived from climate change: the proliferation of new pandemics, such as cholera outbreaks already detected in 30 countries.
Debt. The IMF estimated in 2021 that world debt reached 226 trillion euros, which represents 256% of global GDP. Public debt, which was equivalent to all the world’s wealth, accelerated. Europe is also in those parameters, where the obligations of the countries ceased to be a problem while the rates remained below zero. “The ECB has bought large amounts of government bonds while rates have been in negative territory,” says London School of Economics professor and former Italian Treasury Secretary Lorenzo Codogno. Gone is that era, and rate hikes put that mountain of debt back on the risk map.
Ukraine. No roadmap can now rule out geopolitical risks. This year there were two on the analysts’ agenda: the war in Ukraine and the elections in the United States, where the Democrats have managed to save the furniture. “War is the main factor today in Europe. And almost everything is connected to that conflict,” says Nicolas Veron, a fellow at Bruegel and the Peterson Institute for International Economics. The Russian attacks caused a crisis in the markets for raw materials and energy that amplified inflationary tensions and reversed the process of economic recovery, especially in Europe.
China. The recent protests in the streets of the main cities of the Asian giant were seen just a few weeks ago as a new source of instability. However, it took just hours for the markets to turn from red to green. In just one day they saw that these demonstrations were going to be a revulsion for the country’s authorities to decide to start lifting the strict confinements due to the policy of covid zero. “China is going to grow 5.5%, more than we expected. Europe will benefit less from this advance, because it will mean more demand for energy and keep prices higher than we thought,” says Alicia García-Herrero, chief economist at Natixis. Doubts persist, however, about the country’s real estate bubble, which has already shown several signs of fatigue.
Shadow banking and cryptocurrencies. The institutions have identified all the above risks. The concern is, however, in what they do not see: all the assets that remain in the shadows, off the banks’ balance sheets. Last October, the European Systemic Risk Board issued a notice for the first time since its creation in 2010, identifying “a number of serious risks to financial stability.” The economic deterioration, in his opinion, could give rise to bubbles such as real estate, but also products deposited in non-financial entities. “There is a growing financial risk, which could provoke another shock important”, affirms García-Herrero. Central banks are on guard. The Bank for International Settlements (BIS) has warned that there are 65 billion euros of hidden debt in foreign currency operations off the bank’s balance sheet. The president of the ECB, Christine Lagarde, recalled this week the collapse of cryptocurrency platforms such as FTX. And there are still many carpets to lift.
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