Nouriel Roubini might often be deemed “Doctor Doom”, but he has a nasty habit of being right. So when he talks about the “unavoidable crash”, we should take note.
And when an army of other economists begin to follow suit, our policymakers would be rash not to batten down the hatches. Financial Secretary Paul Chan Mo-po caught the right note in the Legislative Council earlier this week when he promised that the government would be prudent in its fiscal spending, but many leaders worldwide have yet to get the memo.
Roubini, professor emeritus of economics at New York University’s Stern School of Business, pulled no punches in an article last week. The world is “lurching toward an unprecedented confluence of economic, financial and debt crises”, and this “mother of all stagflationary debt crises” cannot be avoided.
Beyond the commonly discussed challenges created by the Covid-19 pandemic, the energy, food and supply chain crises triggered by a combination of the Russian invasion of Ukraine and the pressing need to move away from fossil fuels because of global warming, Roubini points to one factor above all others: unprecedented indebtedness. It’s not just government debt, but household, corporate and financial-sector debt as well.
Households will be squeezed as mortgage repayment costs soar. Governments under pressure to rebuild healthcare systems in the wake of the Covid-19 pandemic have to contend with soaring debt service costs. Unctad says low-income countries last year spent almost 10 per cent of revenues on servicing their debts.
Roubini notes that debt in advanced economies is 420 per cent of global GDP. Overborrowing has happened for decades, he says, and many borrowers are set to become “insolvent zombies” hit by a triple whammy of a sharp jump in debt repayments, a sharp drop in real incomes eroded by inflation and a sharp fall in asset prices, particularly housing prices.
Through the zero-interest-rate quantitative easing era in place since the 2007 global financial crisis, this debt surge concerned few economists or policymakers. But as a sharp spike in inflation has forced up interest rates, governments and households with high levels of debt are set to be hit hard.
Roubini’s warnings come as economists worldwide point to collapsing GDP growth rates through 2023, with many economies expected to experience contraction. Hong Kong is forecasting a 3.2 per cent full-year contraction, and we are in good company – Germany’s economy is forecast to contract by 0.3 per cent next year.
A recent International Monetary Fund blog forecasts 1 per cent GDP growth in the United States next year and just 0.5 per cent across Europe, predicting “for many people, 2023 will feel like a recession”. Developing countries remain the most vulnerable, with the IMF concerned that “too many low-income countries are in, or near, debt distress”. But this does not mean the world’s richest economies do not face acute pain.
Commentators are already talking of a winter of discontent ahead as labour groups in many countries are proposing strike action. In the UK, there have been strikes by railway workers, nurses, ambulance workers, civil servants, postal staff and bakers, with strikes threatened by teachers and firefighters. In the US, New York Times journalists are going on strike.
Parallels are being drawn with Britain’s 1978 “Winter of Discontent”, in which extensive strike action including gravediggers and refuse collectors brought the country to its knees as Christmas approached. It led to the downfall of the Labour government led by Jim Callaghan a few months into 1979.
History might not be repeating itself, but it is certainly rhyming. Both instances have the threat of recession following a severe oil price crisis and acute inflation with wages struggling to keep pace. The 1978 winter was one of the coldest on record, with many shivering through a bleak, dark winter. Many are hoping the coming winter will not be similarly cold.
Making things potentially worse this time round are the public pressure to rebuild in the wake of the pandemic and high levels of debt. Also, remember that Britain’s 1978 winter of discontent was largely confined to Britain. This time round, many economies face a grim, depressing winter, with falling stock and property prices affecting even the rich.
Debt – like inflation – is a particular problem because it is difficult to bring under control without aggravating recessionary forces. As numerous bodies from the IMF to the Institute of International Finance have elaborated, debt can only be reduced – and then only slowly – by strong growth, government spending cuts, privatisation of government assets, wealth taxes or simply debt defaults. With strong growth unlikely as recession looms, none of the other options are attractive or easy.
For Hong Kong, there is a silver lining as, unlike many economies worldwide, it has negligible debt. While the economy has contracted in 2022, at least inflation is also negligible. Compared to other communities worldwide, 2023 might not be as awful as Roubini predicts.
All we await is a reopening of China’s economy. After timid opening steps in recent weeks, that might come sooner than expected. Despite Roubini’s warnings, our winter may not be so discontented after all.
David Dodwell is CEO of the trade policy and international relations consultancy Strategic Access, focused on developments and challenges facing the Asia-Pacific over the past four decades