PETER OBORNE: Red lights are flashing. An economic hurricane is coming…and we should all be scared
On the surface, things are looking rosy. The Office for National Statistics last week announced that employment was at 76.1 per cent — the joint highest level since records began.
Consumers are still spending. The International Monetary Fund says that the British economy will grow 1.4 per cent next year.
But I’m not reassured. In fact, I don’t mind admitting that I’m rather scared. This week the red lights began to flash, a warning that a global recession is on the way.
A Lehman Brothers worker in London is pictured carrying his belongings out of the firm, which collapsed before the 2008 crisis. Last week we learned that the UK economy — the world’s fifth largest national economy — shrank by 0.2 per cent in the three months to June this year
And not just a normal recession of the kind which comes along every decade or so. I fear that an economic hurricane might be about to descend.
Here in Britain and around the world we should prepare ourselves for job losses, failed businesses and busted hopes, and Brexit will have little to do with it.
Before I wrote about politics, I was a financial correspondent, and I know that economic trouble comes hand in hand with political turmoil.
Go back to the Great Depression of the 1930s. It led to the rise of fascism in continental Europe and World War II. I don’t believe that history repeats itself, but it’s safe to say all kinds of problems lie ahead.
Let’s take a more detailed look at the warning signs. Last week we learned that the UK economy — the world’s fifth largest national economy — shrank by 0.2 per cent in the three months to June this year.
Donald Trump’s threats against President Xi Jinping of China may win him domestic popularity. But it’s plain to see that the world is reverting into a system of rival protectionist blocks, reversing the direction of travel of the last 50 years
Some experts dismissed it as a blip caused by companies reducing stocks which had been expanded ahead of Britain’s original expected departure from the EU on March 29.
Perhaps. But look at Germany — globally the fourth largest economy and the engine room of Europe. Industrial production suffered its worst annual drop in a decade, and Gross Domestic Product (GDP) also fell by 0.1 per cent in the second quarter of 2019.
At least Germany is strong enough to weather a storm. Not so Italy, which is a financial catastrophe waiting to happen.
The country owes an eye-watering $2.3 trillion in public debt. GDP growth is all but non-existent and business confidence even lower amid political instability.
Its fragile governing coalition looks finished, with Matteo Salvini — deputy prime minister and head of the far-Right League party, — pushing for snap elections in the autumn.
Most of all, though, I am unsettled by China, the nation that has driven global economic growth for the last three decades.
The terrifying truth is that world growth has been financed on a borrowing splurge for the past decade. According to the Institute of International Finance, world debt rose $3 trillion in the first quarter of 2019, to $246 trillion — that is three times global GDP
Industrial production growth hit a 17-year low in July. At the same time, China’s export-led growth has been slowing fast. In July, it slumped to less than 5 per cent — Beijing needs much higher growth to sustain its investments at home and abroad.
Of course, cyclical downturns of this kind, however unpleasant, are routine occurrences. What makes me truly nervous about this one is mounting global debt, which now stands at a far higher level than it did ahead of the 2008 recession.
This is deeply worrying because back in 2008, governments around the world were able to solve — or, at least, ameliorate — the problem by investing huge sums, bailing out banks and re‑floating the economy via quantitative easing (in which central banks injected new money into the system).
Yes, it worked then, but if another financial crash of that size happens, we lack the means to do it again. National balance sheets have not recovered.
And it’s not just national debt. Average UK household debt is now more than £15,000 — that’s £2,000 more than the alarming level reached in 2008.
Consider this terrifying statistic: unsecured debt stood at a £286 billion in 2008. That was unsustainable then, but today it stands at £428 billion.
The same trends are seen internationally. Last week, U.S. mortgage debt reached a record level — $9.406 trillion, according to the Federal Reserve Bank of New York — which, for the first time, surpasses the high of $9.294 trillion from 2008.
On Wednesday something sinister occurred. For the first time in 12 years, yields on long-term bonds fell below those on short-term bonds.
For the last half century, this so-called inversion of the yield curve has been an infallible sign that recession is on its way.
The terrifying truth is that world growth has been financed on a borrowing splurge for the past decade.
According to the Institute of International Finance, world debt rose $3 trillion in the first quarter of 2019, to $246 trillion — that is three times global GDP. Unimaginable. And, I’m afraid, unsustainable.
As all of us know from sometimes unpleasant personal experience, you pay a price if you live beyond your economic means. A day of reckoning is on its way.
Go back to the Great Depression of the 1930s. It led to the rise of fascism in continental Europe and World War II. I don’t believe that history repeats itself, but it’s safe to say all kinds of problems lie ahead. Traders are pictured outside the Stock Exchange during the Wall Street Crash of 1929
The situation is made even more dangerous by looming trade wars.
Donald Trump’s threats against President Xi Jinping of China may win him domestic popularity. But it’s plain to see that the world is reverting into a system of rival protectionist blocks, reversing the direction of travel of the last 50 years.
The World Trade Organisation — which has done so much to create wealth by freeing up global trade — is almost impotent.
Worryingly, that’s the institution which post-Brexit Britain will depend on when we quit the security of the EU single market and customs union. But Brexit, no deal or otherwise, isn’t the reason for what may unfold in the coming year.
Expect a wave of national bankruptcies. One already looks inevitable in Argentina, and certain in Italy, which can’t survive in the Eurozone for much longer. Nor can Greece. And the knock-on effects will be huge.
We have become used to relatively benign economic growth stretching over decades. Now the world is entering a new and dangerous environment.
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