One of those clunky bits of financial jargon like ‘sub-prime mortgages’ during the global financial crisis could prove to be liability-driven investing we’re all going to be familiar with. These derivative contracts have been used by UK pension funds to ‘protect’ their investments in the bond markets and to hedge against fluctuations in interest rates. Unfortunately, the wild rise in UK government bond yields and the fall in bond prices after the Liz Truss government unveiled a ‘mini budget’ at the end of September was so extreme that pension funds had to increase their liquidity, allowing bonds to rise. prices further declined. , The disaster remains for many defined-benefit pension schemes, which have 10 million members and £1.5 trillion in assets under management; The UK central bank was forced to step in. On Wednesday, Bank of England (BOE) officials reiterated that its emergency £65bn bond-buying program would end on Friday, raising the yield on 30-year UK bonds to more than 5%.
Over a decade of easy money looks everywhere, from Britain’s hitherto boring pension fund industry and property markets to overvalued startups in India and elsewhere in much of the developed world. Now, the effects of high interest rates (not positive even after adjusting for inflation) and high inflation are made worse by epic miscalculations by politicians and central banks. The Bank of Japan is alone in the developed world in keeping interest rates low: the yen has plunged to a nearly quarter-century low in response.
Like extreme weather events, hurricanes keep on coming and occur in high frequency. Just as oil prices had slumped due to apparently slow growth in China, the Organization of the Petroleum Exporting Countries (OPEC)’s decision to cut output last week sent them back again. Just yesterday it seemed like chip shortages have shaken supply chains around the world. Last Friday, Samsung Electronics, the world’s largest memory chip-maker, said its operating profit fell by nearly a third for the quarter ended September. Analysts warned that demand for smartphones, TVs and computers is falling “very rapidly”, and chip orders are still rapidly declining due to higher inventories.
On Tuesday, the International Monetary Fund (IMF) cut its global gross domestic product (GDP) growth forecast to an overly optimistic 2.7% in 2023, warning that there is a 25% chance that growth will fall below 2% next year and There is a 15% chance that it could fall below 1%. The problem is that, along with climate change, this slew of bad news, ranging from geopolitical crises and the impact of a stronger dollar on emerging markets to an earthquake in UK pensions, makes economic forecasting all the more problematic, say, predict its progress. Endless Indian monsoon of the year.
Unpredictable politicians make it harder still. OPEC+’s decision last week to cut output by 2 million barrels per day, or 2% of global output, was justified by Saudi Arabia as a response to rising interest rates and weak global growth. Still, its timing has led many observers to suggest a bizarre settlement of political scores directed at the Joe Biden administration by Saudi Prime Minister Mohammed bin Salman Al Saud. The Saudi administration is seen as biased towards former President Donald Trump and his family. Higher oil prices could prove crucial to damage prospects for US Democrats and tilt the balance in the US Congress after midterm elections due in a few weeks. President Biden may regret saying during his election campaign that “the current government in Saudi Arabia has little social value.” There is a lot of truth in this, but unless the world rapidly shifts to non-fossil fuels, real politics demands prudence. Then, there may be a period of sustained high oil prices that the world needs to reduce its reliance on oil, but the timing is not ideal. Currencies in emerging markets are under pressure from Indonesia as the current account deficit in India widens dramatically (7% of GDP in the Philippines as of the end of this year).
None of this undermines the resolve of the world’s autocratic and populist gangs, who take pride in laughing in the face of economic realities. The bombing of civilian targets by Russian President Vladimir Putin and handing over control of the war effort to a general in Syria with a reputation for brutality shows that Russia’s invasion of Ukraine is getting ugly. In China, President Xi Jinping is baffled by his intention to pursue a COVID eradication strategy despite relatively low vaccination rates, inferior China-made vaccines and the high transmission potential of omicron variants. China’s prolonged property market slowdown and a sharp slowdown in GDP growth are hurting Asian economies and global demand. If control of the upcoming US midterm Congress passes into the hands of Republicans, Trump’s grip on the party will be further strengthened. The passive stalemate in American politics will only intensify.
This week, IMF Chief Economic Adviser Pierre Olivier Gourinches highlighted the new UK government’s peculiar dislike of economic conservatism and expanded fiscal policy through lowering taxes and higher spending a fortnight ago, just as the BoE tightened. . He said it was like two drivers in the same car with different steering wheels. The trouble for the global economy is that many of the world’s political leaders seem to be driving drunk, even as many succumb to the hairpin financial strain. Forget the Bollywood fantasy that India can tear apart. Buckle your seatbelts, as the old line goes, it’s going to get bumpy.
Rahul Jacob is a Mint columnist and a former foreign correspondent for the Financial Times.
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