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The polycrisis dilemma: The global economy faces a ‘war of all against all’


Natale Labia writes on the economy and finance. Partner and chief economist of a global investment firm, he writes in his personal capacity. MBA from Università Bocconi. Supports Juventus.

A polycrisis, according to economic historian Adam Tooze, is a situation where one faces multiple crises, and the whole is more dangerous than the sum of the parts. It is hard to find a more accurate description of the challenges facing the global economy at present.

Last week, the International Monetary Fund (IMF) clarified just how gloomy the outlook is. The European energy crisis, multiple interest rate rises and structural economic problems in China are all now coalescing. To drag out the weather metaphor, it is quite simply a perfect storm. 

Furthermore, the contrasts with 2008 – the last time the outlook was comparatively grim – are stark. 

First, it is rare for nearly all parts of the global economy to be stalling simultaneously. The IMF estimates that roughly half of the global economy will either be entering recession this year or next. 

Prospects for the world’s largest economies – the US, the Eurozone and China – are all bleak, if for slightly differing yet interconnected reasons. 

In 2008, the developed world could look to China to embark on the largest fiscal binge in history. Now, saddled with mountains of debt following those years of gluttony, it has no fiscal space left to breathe.

While much of the world in 2008 was facing deflation, inflation is now at its highest in 40 years. It is a largely academic debate as to what is worse. However, inflation makes life much harder for central bankers, who are now hiking interest rates with a synchronicity and aggression not seen for half a century – just as the global economy is teetering.

Unlike 2008, where the causes of the credit crunch and ensuing recession were the topic of a frenzied academic debate – to grasp the dynamics of the subprime crash, a PhD in economics and a few years of working in finance helped – the causes of this maelstrom are obvious: the pandemic and Russia’s invasion of Ukraine. 

But that is not to say the cure will be any more straightforward. Indeed, with China now suffering a debt crisis and housing crisis, it is clear that new ailments are already surfacing. 

However, on rereading “Crashed” – Tooze’s magisterial account of the financial crisis and Great Recession that followed – the most glaring difference this time around is the singular lack of a coordinated global response. Twenty-three years ago, we had the G20 summit hosted by Gordon Brown in London to hammer out a set of shared solutions. Now, by contrast, there is total chaos. It almost feels more like a Hobbesian “war of all against all”.

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The epicentre of the inflation crisis, the US, is hellbent on getting prices down, with the Federal Reserve raising interest rates at unprecedented rates, thereby driving up the value of the US dollar and crushing all other currencies. For energy importers and those that have borrowed in the greenback, this is ruinous. 

Last week, economist Ruchir Sharma implored in the Financial Times that the US should “act now to control the wrecking ball US dollar”. Except, of course, it will not – because it doesn’t care. A strong dollar is possibly the one thing it has in its favour to get on top of breakneck inflation.

Only last week, this disorder was all too evident. In Vienna, Opec+ announced it had decided to cut oil production to maximise revenues today, thereby driving energy prices higher and further turning the screw on energy importers. 

In Beijing, at the annual Communist Party conference, in a nearly two-hour speech, President Xi Jinping signalled his intention to steer the world’s most populous country and rising superpower away from reconciliation with the West, as he warned of “grave international developments” not seen in the past 100 years. Finally, we need not elaborate on Russia’s declaration of war on the entire world order – a vaingloriously existential struggle.

It is self-evident, therefore, why the IMF is so bleak. However, it is a strange twist of irony that the problems most specifically affecting South Africa – crumbling infrastructure, interminable power cuts and a permanently striking labour force – are of its own creation. 

The challenges facing the global economy will not last forever. The recession may be brutal and prolonged, but at some point growth will return. 

At that point, South Africans can only hope there will be enough of a domestic economy left to take advantage of it. BM/DM


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