An interesting analysis in the Financial Times declares that “the weakest parts of the global economy are mending.” Countries such as Turkey, Argentina, Egypt, Nigeria, and Kenya have implemented fundamental and necessary reforms, contributing to the global economic recovery from the recent pandemic. Well, kudos to them!
But we realized that it is not these “weakest links” that we need to worry about, but the supposedly strongest ones: Germany, China, and the United States. Given its size, the damage would be even more severe for everyone.
Let's start with the biggest of them.
The nonpartisan Congressional Budget Office just warned that the ballooning federal debt could collapse the government and cause a collapse in the U.S. dollar. The recent cycle of rising interest rates means Washington will pay interest on his US$1 trillion to creditors by 2026. The total federal debt reaches her US$ 26.2 trillion, or his 97% of GDP. On its current trajectory, federal debt will reach 166% of GDP by 2054.
The huge tax cuts that Donald Trump made when he was president contributed significantly to the debt buildup. He has promised further cuts if he wins in November.
The U.S. budget watchdog has said that financing deep tax cuts with large amounts of borrowing could result in a sudden drop in the dollar, similar to what happened to former British Prime Minister Liz Truss, who was in power for only a month and a half. They warn that it could lead to a collapse.
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But it's not just the U.S. financial situation. Its geopolitics is proving to be highly damaging to the global economy. In an interesting essay, Malaysian economist and former UN Assistant Secretary-General for Economic Development Jomo Kwame Sundaram explores how the Biden administration will use industrial and state-led policies to support its geopolitical goals. We are analyzing whether it has been turned into a weapon.
“Today's geopolitics shows a renewed interest by the West in industrial policy as a weapon in the new Cold War,” he wrote. “This is in contrast to the long-standing interest in industrial policy. [which] For many, it has long been associated with postcolonial development efforts. ”
This is not just a matter of the United States favoring some industries, such as advanced microchip manufacturers, over others. Allies are also forced to pursue similar goals against countries they see as hostile, such as China. Taken to its extreme, this would mean he would split the highly integrated world economy into two distinct economic blocs, thereby harming overall future growth.
The deterioration of China's economy is well known. After decades of rapid growth, even officials in mainland China and Hong Kong are now warning that 5% growth targets will be difficult to reach, but still achievable. We can no longer rely on old growth engines like real estate, infrastructure, and manufacturing. Local governments have been forced to deleverage and many infrastructure projects have stalled. The manufacturing industry is suffering from overcapacity and capital flight is a worrying situation.
Meanwhile, Germany's economic growth model is collapsing, and the United States is encouraging the country to dig itself into an even deeper hole. The country already had the worst performance among major economies last year.
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By being more aggressive than other Western allies in defending Ukraine, the unpopular coalition further weakened the economy, tore apart long-standing domestic political and economic consensus, and thus spawned extremism. All three pillars of its growth have collapsed or are collapsing. Cheap energy now gone with Russia, exports and manufacturing deeply damaged by hostility with its biggest customer, China.
Europe's industrial powers are being hollowed out. High energy costs have devastated its powerful chemical and heavy industries. The once-proud auto industry has lagged behind on electric vehicles, leaving the sector wide open to China.
In his 2018 book, Germany's Hidden Crisis: Social Decline in the Heart of Europe, sociologist Oliver Nachtwey argued that the cracks between the social democratic consensus and economic growth had long been visible. . In other words, Ukraine appears to have only accelerated its decline.
As the world's largest economy slumps and governments find themselves in dire straits, we are all worse off.
