2022 was bad enough but 2023 could be the year that all of today’s problems come to a head, financial experts warn.
War in Ukraine, rampant Covid in China, growing financial problems in Japan and an EU monetary meltdown could combine to trigger another global financial crisis.
Some reports suggests that up to 750million people in China could catch Covid, bringing its economy to a halt and killing more than two million.
This is the world’s largest even pandemic and will be a human disaster on a staggering scale, with patients going untreated as medication and oxygen tanks run out.
There have even been reports of families burning dead bodies of loved ones in the streets as local crematorium are running at full capacity.
The global economic impact could also be brutal. George Magnus, an economist and associate of Oxford University’s China Centre, has warned that the China’s Covid nightmare could “choke” supply chains as ports become congested, exports fall and “people won’t turn up for work because they are sick.”
The world’s shipping industry was brought to a standstill when the virus first emerged, and this could be even worse as Chinese Premier Xi Jinping allows Covid to let rip among a population of 1.4billion which has little immunity and low quality vaccines.
Asset management giant BlackRock wrote in its 2023 Global Outlook that a recession is “foretold” in 2023, a claim backed by JPMorgan Chase chief executive Jamie Dimon.
Now Kenneth Rogoff, professor of economics and public policy at Harvard University, is the latest to warn of “systemic risk” that could collapse the global economy.
Soaring global inflation has brought the era of ultra-low interest rates to a sudden end, and could trigger disasters in advanced countries, with Japan and Italy particularly vulnerable, said Rogoff, a former IMF chief economist.
He said it is a “minor miracle” that the world did not experience a systemic financial crisis in 2022, giving rising inflation, interest rates and “a massive increase in geopolitical risk”.
The global financial system now faces a huge stress test, he wrote in The Guardian today, as public and private debt has risen to record levels.
A crisis in an advanced economy such as Japan or Italy would be difficult to contain, with the banking, private equity, housing and commercial real estate sectors on the brink of “a sharp, sustained drop”.
Rogoff said Japan might be the world’s most acutely vulnerable country. The Bank of Japan has kept interest rates close to zero for nearly three decades, but it may be forced to reverse policy as inflation and the Japanese yen both rocket.
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“Higher interest rates would immediately put pressure on the Japanese government, as the country’s debt amounts to 260 percent of GDP,” Rogoff said.
This could unearth “hidden vulnerabilities” in the financial sector and trigger meltdown, while “further monetary tightening could blow things up”.
Italy is also at serious risk of systemic meltdown and this could infect the single European currency, too.
Rogoff said that “ultra-low interest rates have been the glue holding the eurozone together”, but now that era is over as the European Central Bank turns hawkish with more rate hikes due this spring.
Eurozone members have effectively offered open-ended guarantees for Italy’s huge debt mountain, but these could soon prove unaffordable as borrowing costs soar.
Rogoff said: “A sustained wave of monetary tightening could, as with Japan, reveal enormous pockets of vulnerability.”
Top financial analyst Jeremy Batstone-Carr, European strategist at Raymond James, has warned that EU is sitting on a massive €1trillion debt “volcano” that is preparing to erupt with destructive force.
As we exclusively reported, he said it could “blow like Vesuvius” with enough force to wipe out the German economy.
The risks are piling up. We may avoid a financial crisis but this would be “a very fortunate outcome”, Rogoff concluded.