The world economy’s ‘strongest’ may be the weakest links today
- When the world’s biggest economies are in the doldrums and their governments are at loggerheads, we are all much worse off
An interesting analysis in the Financial Times has declared that “the weakest links in the global economy are on the mend”. Countries such as Turkey, Argentina, Egypt, Nigeria and Kenya have been carrying out radical but necessary reforms and are contributing to the global economic recovery from the recent pandemic. Well, kudos to them!
It strikes me, though, that it’s not those “weakest links” but the supposed strongest ones – Germany, China and the United States – that we need to worry about. Given their sheer size, the damage would be much worse for everyone.
Let’s start with the biggest of them all.
The non-partisan US Congressional Budget Office has just warned the ballooning federal debt could collapse the government and cause a run on the greenback. The recent rising rate cycle means Washington will be paying creditors US$1 trillion in interest by 2026. Total federal debt has hit US$26.2 trillion or 97 per cent of GDP. Federal debt at its current trajectory will reach 166 per cent of GDP by 2054.
Sweeping tax cuts by Donald Trump when he was president contributed greatly to the accumulating debt. He promises more cuts if he wins in November.
The US budget watchdog warns that financing deep tax cuts by borrowing heavily could cause a sudden run on the dollar, much like what happened to former UK prime minister Liz Truss, who was in power for little more than a month and a half.
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“Today’s geopolitics has seen a renewed Western interest in industrial policy as a weapon in the new Cold War,” he wrote. “This contrasts with long-standing interest in industrial policy, [which] for many, has long been associated with postcolonial development efforts.”
It’s not just a matter of the US favouring select industries, such as advanced microchip makers, over others. It is also forcing allies to pursue similar goals against countries deemed hostile, like China. If carried to extremes, this means dividing a highly integrated world economy into two different economic blocs, thereby undermining collective future growth.
China’s economic turn for the worse is well-known. After decades of fast growth, even mainland Chinese and Hong Kong officials now warn it will be difficult, but still doable, to achieve a 5 per cent growth target. It can no longer rely on old growth drivers of real estate, infrastructure and manufacturing. Local governments are being pressured to deleverage, scuppering many infrastructure projects. Manufacturing suffers from overcapacity and capital flight is alarming.
Meanwhile, the German economic growth model has collapsed, and the US is encouraging it to dig a deeper hole. It was already the worst-performing major economy last year.
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For being more gung-ho than any other Western ally over defending Ukraine, its unpopular coalition government has weakened the economy further and fractured its long-standing domestic political-economic consensus, thus giving rise to extremism. Its three pillars of growth have all collapsed or are collapsing: cheap energy, now gone with Russia, exports, deeply compromised by antagonising its biggest customer, China, and manufacturing.
Europe’s industrial powerhouse is deindustrialising. High energy costs have devastated its mighty chemical and heavy industries. Its once-proud auto-industry has missed the boat on electric cars, leaving the field wide open to China.
In his 2018 book, Germany’s Hidden Crisis: Social Decline in the Heart of Europe, sociologist Oliver Nachtwey has argued cracks in the social-democratic consensus and economic growth appeared long before. So it seems Ukraine has merely accelerated the decline.
When the world’s biggest economies are in the doldrums, and their governments are at loggerheads, we are all worse off.
