Noel Quinn is the chief executive officer of HBSC – the seventh largest bank in the world. He says that “a global reckoning” could be on its way. After the 2008 financial crash, and then again during the Covid epidemic, government debts exploded.
Quinn said last week that this could lead to “a tipping-point on fiscal deficits”. When it happens, it will be fast. And it will affect a lot of countries. The International Monetary Fund (IMF) and World Bank both issued similar warnings in less graphic language.
According to the IMF, global GDP is expected to grow by 3pc this year and then fall back down to 2.9pc in 2024. This is too slow for governments who are struggling with debt. According to the IMF, global GDP will grow by 3pc in 2018, and then fall to 2.9pc by 2024. This is well below the average global growth of 3.8pc between 2000 and 2019.
Inflation and interest rate increases have slowed down the post-pandemic recovery. In the UK, rates have risen from 0.1pc up to 5.25pc in the past two years. The West region has seen a stubbornly high level of inflation, the exact opposite of the “transitory” that misguided central banks have been using throughout most of 2021.
The cost of borrowing by the government has increased as central bank rates have. US sovereign bond rates have reached 5pc – the highest level since 2007, right before Lehman’s collapse. The UK’s 30 year gilt yield has now reached 5.2pc, a 25-year-high.
The West is stuck in a trap of high debt, high taxes, and slow growth. It’s hard to get out of it, as the economic orthodoxy has a firm grip. What could be Quinn’s “tipping-point” which drives bond yields higher and causes fiscal and financial turmoil?
Some say that America is in a recession, and the market will collapse – but I do not buy it. The largest economy in the world looks resilient. On track to grow 2.1pc next year and 2.5pc by 2024. Market jitters are present and President Joe Biden is spending heavily. US financial institutions have better capitalisation than they did in 2008, despite the failure of Silicon Valley Bank.
The drop in inflation from 9.1pc to 3.7pc has boosted real wages, confidence and GDP growth. Jerome Powell of the Federal Reserve said that inflation has “moderated”, but I still believe US rates will be held when Fed policymakers gather on Wednesday.
Some people say that China can bring down other financial markets, but I disagree. has been struggling since it emerged from an extended lockdown in the last year.
Beijing has stopped publishing data on youth unemployment after the rate of joblessness among 16-24-year-olds reached 20 percent. Hong Kong’s Hang Seng Index is now in “bear-market” territory, having lost one fifth of its value so far this year. Both the Shanghai and Shenzhen indexes are at four-year lows.
After years of debt-fueled growth, China’s real estate sector is now creaking. Around 70pc household wealth is tied to property in China. Fears that the property bubble may burst has caused financial markets around the world to be unnerved.
In China’s largest cities, strict lending regulations have set the minimum down payment ratios at 30-40% for first-time purchasers. This rises to 80pc for those who are investors. The property market in China is less “leveraged”, and therefore less fragile, than its US counterpart, before the Lehman collapse of 2008.
China is still a country with a GDP per capita of “middle income” – there’s plenty more room for growth. There is still room for interest rates to be cut. According to the latest figures, the GDP increased by 4.9pc in the third quarter. I think it’s premature to talk about a China crash upending the global markets.
The eurozone is more likely to reach a “tipping point”, as it will only grow by 0.7pc in 2023, and then 1.2pc the following year, while accumulating huge debts. In 2011, the monetary union was almost destroyed by the spreads between German, Italian and Greek bonds.
Giorgia Melons, the Italian prime minister, is still spending lavishly and pushing her luck. The risk spreads between Italian 10-year bonds and German bunds are now above 2 percentage points. This is only half of the four-plus-point spread from 2011, but Italian government debt has risen to over 140pc. Italian government borrowing rates are now above 5pc, the highest since 2011.
It will take Italy a year to refinance debt that is equal to 24pc or its annual GDP. Moody’s has just cut Italian sovereign debt to a notch above junk. Italy has some world-class businesses and is relatively rich. It lacks growth, as the GDP is the same as in 2006.
The European Central Bank, while Germany, and other “northern creditor” complain, will rescue Rome by reverting back to high-octane quantitative easing in order to purchase Italian bonds. The bailout is inevitable – the “European project” must be safeguarded at all costs.
It will take a lot of time and political drama before we get there. This could lead to a huge amount of stress on sovereign debt markets around the world and economic consequences that extend beyond Europe.
Fitch Ratings says that the UK will face the largest debt interest bill of the developed world in 2018. The UK will spend PS110bn or 10.4pc on debt service in 2023, the second highest item on the balance sheet of the government after the NHS. This is due to the high percentage of inflation-linked gilts.
The UK economy is stagnating, and the latest PMI surveys suggest that GDP has already contracted. This is one of the reasons why the Bank of England will surely keep rates at their current level on Thursday.
As an oil-importing country with very little gas storage, Britain could be particularly vulnerable if a combination of Middle Eastern turmoil, geopolitical intrigue, and a cold winter causes a surge in oil and gasoline prices. This could cause inflation to rise again and push government borrowing costs higher.
In my opinion, Europe is more likely to be the “tipping-point” that triggers a global reckoning than the US or China – this includes the UK.