A triple-headed risk is suddenly bearing down on the global economy as Grexit, the Chinese structural adjustment and US tightening combine to threaten a perfect storm. Each represents a different kind of shock but all three share one characteristic; they are attempts by large economies to exit extraordinary GFC stimulus:
- Europe is ending the farce that internal deflation can repair peripheral economies without external demand support;
- China is ending the construction bubble it unleashed to counterbalance the current accounts adjustments of the GFC;
- the US is raising interest rates to restore the cost of capital, and
- all three are framed by a world of excess capacity and debt saturation in which Great Powers are at war over market share.
So, are we witnessing the beginning of the end of the global business cycle? Cycles usually end with inflation and interest rate hikes but given the vastness of the previous crisis and the depth of remaining global imbalances should we expect actual interest rate rises to be needed to end this one? Or will the removal extraordinary support be tightening enough?
