The perfect storm in the global economy

By | May 10, 2023

HE international markets course from mid-March to now can be characterized as pretty smooth. Since the initial shock of the US banking problems wore off, investors appear to have relaxed the assumption that interest rate hikes are coming to an end, giving them optimism about how things are going in the economy and the markets. It is possible that they are right and that little by little things will return to the situation of relative calm that prevailed in the markets until the beginning of 2022, which would not bother us at all.

But to be realistic, we can’t ignore the fact that there is one all around us right now. multitude of problems what could bring her economy and markets in crisis conditions. Some of these are on the rise and others we assume are in decline or within our control. But what if we suddenly had to deal with all of this together?

HE inflation is he main problem what concerns us since mid-2021 and caused the change in monetary policy and the significant increase in interest rates. Its course may have been falling for a few months, albeit slightly, as yesterday’s announcements in the US showed, but it remains at high levels and that is why we have the significant increase in the cost of money. Most investors assume that the reverse process will soon begin and that interest rates will begin to decline. But if we listen to what central bank officials tell us, we should not expect this process to start before 2024. This means that the pressure on the US banking system, and especially on regional banks, will continue. Fears of the immediate appearance of new problems in certain banks may have subsided, but it is not entirely prudent to assume that the risk has been overcome.

Along with the pressures banks face, there is always the fear that high interest rates will propel western economies towards recession. For the moment, it seems that this has been avoided, but it must not be forgotten that the consequences of the rise in interest rates take time to appear, so the risk continues to exist. On the question of the possible recession, we must also take into account the one that is coming weak Chinese economy achieve a strong recovery. A coordinated decline in economic activity in Western countries and China will undoubtedly be a dangerous development.

Concerns about the strength of Chinese growth are also reflected in the downward trend in steel and iron ore prices, which are always strongly influenced by Chinese economic growth. They are blamed for the weakness in crude prices, despite the efforts of OPEC countries, which have usually ignored US appeals, to keep prices high by reducing crude production.

significant weakness also appear natural gas prices in the united states and europe. In general, this is not a bad thing because it helps the economy, especially in Europe, to recover from the shock of last year’s big price increases. But can we be sure that prices will stay low?

Reading a recent Bloomberg report on the European natural gas market, we get the impression that a climate of complacency has begun to emerge, as various market players begin to talk of a significant further reduction in its price. No one is worried (at least openly) anymore about a possible recurrence of the energy crisis that last year put Europe in a very difficult position.

And yet, such an eventuality is not so improbable in the event that the weather conditions stop favoring the reduction of electricity and natural gas consumption. This was also remembered a few weeks ago by the Russian company Gazprom, which warned of the difficulties that Europe will face if the weather conditions become extreme for a long time.

Obviously, the gazprom he would love to see prices skyrocket and Europe back in crisis. Maybe she will try to put the “hand” on her in some way. But this is not to say that she is wrong when she says that the return of the energy crisis is not a science fiction scenario.

Talking about Russia also brings to mind some geopolitical issues that could cause disruptions in the economy and international markets at any time. The escalation of the US-China rivalry, the US attempt to stifle China’s technological progress, and moves by many countries outside the Western central alliance to try to reduce the US dollar’s share of the international trade are some of the that’s all. It is clear that a process of changing the global status quo is underway, both at a purely economic level and, in general, at a geopolitical level. And, of course, we must not forget that the war in Ukraine is still ongoing and no one knows what could “go terribly wrong” at any moment.

But there is something else that could cause great damage to the global economic climate and international markets, which has nothing to do with the international situation but only with the internal situation in the US. on the subject of public debt. Not so much because of the burden that the state budget is gradually beginning to accept, as the US government is now being forced to borrow, by issuing bonds, at much higher interest rates than it was a few months ago. Potentially, this burden can cause great damage to the country’s fiscal balance and, ultimately, to its economy.

But what can cause a great and sudden shock in a very short time from now she is the possible suspension of payments due to the impossibility of an agreement between President Biden and the Republican majority in the House on the issue of raising the debt ceiling of the US government.

In theory, based on what we’re reading, we could be at that point in less than a month from now. Although it is almost certain that eventually some compromise will be reached between the two parties, we must remember that the last time we experienced something like this, specifically in 2011, the S&P 500 index of the American stock market lost 17% in just a few weeks and that the political situation in the US back then was not as polarized as it is today.

Tremors in the banking system due to the rise in interest rates, concern about a possible recession in the economy, increased tension worldwide, whether we are talking about international trade or the oil market, greater dependence on the energy stability of weather conditions, partisan disputes with unpredictable consequences in the world’s largest economy. These and more are what concern us. It is quite possible that we can do without it and not have to deal with everything together. But it’s good to keep a “perfect storm” scenario in mind in case everything that can go wrong does go wrong.

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