This is not all airy-fairy. The truth is bizarre but true. The world economy’s law-defying bull run cannot go on for long. It is high time that you saw the warning signals and made appropriate personal finance decisions. This is not being Cassandran. The stark reality is that the world economy, sitting smugly on cloud nine now, is too good to last long. As smart savers and investors, it is time for you to climb down from cloud nine.
Cassandras are a Confused Lot
Undoubtedly, the world economy is proving all naysayers wrong now. It is negating Newton’s law of gravitation and riding high. Despite odds, the economy is putting up a bullish act. Among the threats it faces today, the one from rising interest rates is worrisome. As conflicts rage across the globe – notably in Ukraine and Gaza – and a potential conflict involving China and Taiwan incubates, the mad bull run cannot sustain for long.
The Cassandras are a confused lot today. They are perplexed by the failure of the rising interest rates to trigger a recession. Their confusion gets compounded as the American economy posts a surprising growth of nearly 5% in the third quarter, annualised. The confusion and the surprise are natural. Despite high interest rates, inflation is dipping across nations, joblessness is lingering low and many central banks are going slow on credit squeeze.
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The EU is a Classic Example
These logic-defying macro conditions are too good to be real. Warning signs can be seen not only in America, also in Europe and in far-off places like China and India. China is yet to recover from the Evergrande real-estate crisis and requires phenomenal stimulus. India continues to grapple with declining demand, rising inflation and nettlesome unemployment. These bearish factors and warning signs are not disappearing anytime soon.
As continental Europe too grapples with inflation, many European economies are battling with heavy debt burdens and sluggish economic growth. The 19-nation European Union is a classic example of being in the eye of an approaching storm. Energy shocks caused by the war in Ukraine has been particularly terrible for Europe. The fear of Europeans that good times will not last for long is palpable across the continent.
Even Low-Rate Economies Hit
The symptoms will not disappear soon as the maladies take deep roots in the global economy. Interest rates do not look like falling much. Indications to this effect are emanating from America’s Federal Reserve, aka Fed, and the European Central Bank. Worse, United Kingdom’s central banker, the Bank of England, too may join them soon. As central banks are ensuring the rates stayed steady, the blinking horizon does not augur well.
Confirming the fears that bad times are hiding on the horizon, long-term bond yields have moved up sharply. American government’s borrowing can now happen only at five per cent for 30 years against the earlier mark of a little-over one percent during the Covid pandemic. This interest rate-increase is hitting now even low-rate economies like Japan and Germany. Contrary to popular belief, rising interest rates are alarm bells.
The Savings Cushion Will Vanish
As savings squirrelled away during the pandemic are spent lavishly on consumer goods and durables, most economies are showing signs of robust health. However, when these savings get exhausted, what will happen to the rollicking consumer economies of the world is anybody’s guess. The global economy may run out of cash for discretionary spending anytime now. Unmissably, this is a huge red flag for the world economy.
When this happens, the cushion provided by household savings will vanish and rising interest rates will begin to batter consumers. As if these worrying signs are not enough, corporate bankruptcies are rising in America and Europe (See companion story: The Bankruptcy Bandwagon is Rolling). This is making corporate borrowings more expensive in these regions. Worse, they will start eating into disposable values of real estate and redeemable values of equity.
Will be Left Warped and Worried
This is bound to happen as mortgages and borrowings against equity turn expensive. Many corporate black sheep will be tempted to borrow recklessly during this period, leading to the bankruptcies of not only corporates, but banks too. Battered governments will have to squeeze their tummies, inflicting untold agonies on economic sectors, corporates, employees and consumers. The inevitable may be around the corner.
Under these gathering clouds, will economies of the world be able to work wonders is a billion-dollar question. The stock markets are not panicky yet. Consumers are not worried yet. Corporate employees are hoping rising bankruptcies would be a passing phase. This is sheer optimism. As conflicts intensify, governments across the world are sure to raise the tariff walls. Markets are sure to be left warped and worried.
The MoneyMire’s Last Word
Yet, if you are banking on the world economy, you are in cloud- cuckoo land or on cloud nine. Do not. Here is your personal finance strategy for the coming days of economic reckoning. Review your budget fast and expel discretionary spendings. Bolster your financial immunity by building your cash reserves for the stormy day. Retire debts, retain investments and stay focused on money goals. Bad days won’t be as bad as you fear.