The world economy's big gamble.

With high interest rates, declining savings, and political instability, expecting the global economy to continue growing is "a big gamble," according to The Economist.

Even as geopolitical tensions rise in some places, the global economy remains buoyant. Just a year ago, everyone thought high interest rates would soon lead to a recession. But now even the optimists are baffled that this hasn't happened. On the contrary, the US economy boomed in the third quarter. Around the world, inflation is falling, unemployment remains largely low, and major central banks are signaling a halt to interest rate hikes.

However, The Economist argues that the euphoria cannot last. The foundations for today's growth appear unstable, with many threats ahead.

First, the strength of the economy has led many to believe that interest rates, while no longer rising rapidly, will not fall significantly either. Over the past week, the European Central Bank (ECB) and the US Federal Reserve (Fed) have kept interest rates unchanged. The Bank of England (BoE) has acted similarly.

Consequently, long-term bond yields have risen sharply. The US government now pays 5% on 30-year bonds, up from just 1.2% during the pandemic. Even economies known for low interest rates have seen changes. Not long ago, Germany's borrowing costs were negative, but now the yield on 10-year bonds is nearly 3%. The Bank of Japan is barely maintaining a 1% interest rate on 10-year loans.

Some, including US Treasury Secretary Janet Yellen, argue that these higher interest rates are a good thing, reflecting a strong global economy. But The Economist disagrees, calling them dangerous because prolonged high interest rates could derail current economic policies and disrupt growth momentum.

A trader on the New York Stock Exchange on September 13, 2022. Photo: Reuters

To understand why today's favorable conditions cannot continue, consider why the U.S. economy has recently performed better than expected. People have used up the money they accumulated during the pandemic, and this is expected to run out soon. Recent data shows that households have $1 trillion left, with the least amount of savings since 2010.

As savings dwindle, high interest rates begin to take effect, forcing consumers to spend less. In Europe and America, bankruptcies are on the rise, even among companies that issue long-term bonds to obtain low interest rates.

Home prices will fall—especially after adjusting for inflation—when mortgage interest rates rise. Banks holding long-term securities—backed by short-term loans, including from the Fed—will have to raise capital or merge to close gaps in their balance sheets due to higher interest rates.

Secondly, excessive budget spending has helped countries recover and grow rapidly in recent times, but it doesn't look sustainable if interest rates remain high. According to the IMF, the UK, France, Italy, and Japan are all likely to run budget deficits of around 5% of GDP by 2023.

In the 12 months to September, the US budget deficit was $2 trillion, equivalent to 7.5% of GDP. Given low unemployment, such borrowing is ill-advised. Public debt as a percentage of GDP in wealthy countries is at its highest level since the Napoleonic Wars (1803-1815).

When interest rates were low, even sky-high debts could be managed. Now that interest rates have risen, the public debt is draining budgets. Therefore, high interest rates for an extended period risk causing governments to clash with central banks. In the US, Fed Chairman Jerome Powell has emphasized that he will never cut interest rates for the sake of reducing pressure on the government budget.

Regardless of what Powell says, persistently high interest rates will cause investors to question the government's commitments to keeping inflation low and its debt repayments. The European Central Bank's (ECB) debt has already begun to become unbalanced. Even with Japanese government bond yields at a low 0.8% last year, 8% of the budget still pays interest.

If pressure mounts, some governments will tighten their belts, leading to economic losses. It is possible that a prolonged period of high interest rates will end itself by causing economic weakness, forcing central banks to cut interest rates without causing a sharp rise in inflation.

A more optimistic scenario is a surge in productivity growth, perhaps fueled by innovative artificial intelligence (AI). This would result in increased revenue and profits, enabling companies to afford higher profit margins. The potential of AI in boosting productivity may explain why the US stock market has performed so far. This is largely due to the sustained growth in market capitalization of seven tech giants. Otherwise, the S&P 500 would likely have declined this year.

However, contrary to that hope lies a world lurking with threats to productivity growth. Donald Trump has vowed to impose new tariffs if he returns to the White House. Governments are increasingly distorting markets with anti-globalization industrial policies.

Furthermore, the increasing burden on the budget due to an aging population, the green energy transition, and conflicts around the world demand greater public spending. Given all of this, The Economist argues that anyone betting that the world economy can continue to grow is playing a huge gamble.

Phiên An ( according to The Economist )

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