Warning global economy faces biggest risk since WWII

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A chilling warning has been issued that the global economy is facing its greatest threat since World War II, which could create “deep fear” for the future and put lives at risk.

The boss of US bank JP Morgan Jamie Dimon said the world had been on a stable and safe pathway but suffered a major setback in February 2022 when Russia invaded Ukraine.

Significant challenges continued in 2023 with “the terrible ongoing war and violence in the Middle East and Ukraine to mounting terrorist activity and growing geopolitical tensions, importantly with China,” Mr Dimon explained in his annual letter to investors.

He cautioned that the world “may be entering one of the most treacherous geopolitical eras since World War II”.

While many countries have battled inflation, recession, polarised politics, terrorist attacks, migration and starvation since 1945, Mr Dimon said the world had never faced greater instability.

“As appalling as these events have been, the world was generally on a path to becoming stronger and safer,” he added.

“When terrible events happen, we tend to over-estimate the effect they will have on the global economy. Recent events, however, may very well be creating risks that could eclipse anything since World War II — we should not take them lightly.”

The banking boss highlighted the “abhorrent attack on Israel and ongoing violence in the Middle East” and how these had “punctured many assumptions about the direction of future safety and security, bringing us to this pivotal time in history”.

Threat of wars and nuclear weapons

While he warned artificial intelligence, interest rates and politics were also areas of concern, he singled out a breakdown in international relations as potentially being one of the most harmful things to plague the global economy in the future.

“The ongoing wars in Ukraine and the Middle East could become far worse and spread in unpredictable ways. Most important, the spectre of nuclear weapons – probably still the greatest threat to mankind – hovers as the ultimate decider, which should strike deep fear in all our hearts,” he added.

“The best protection starts with an unyielding resolve to do whatever we need to do to maintain the strongest military on the planet – a commitment that is well within our economic capability.”

With governments forced to fork out more money on issues such as climate change and healthcare, this could result in “stickier inflation and higher rates than markets expect”, he also cautioned.

Progress annihilated

It comes after the International Monetary Fund (IMF) also raised the alarm about the world economy back in December.

The IMF’s first deputy managing director, Gita Gopinath, said “the world economy is on the brink of a second Cold War that could annihilate progress made since the collapse of the Soviet Union”.

Ms Gopinath warned the world was at a “turning point” particularly as tensions mounted between the most powerful nations, while the world economy was increasingly becoming fragmented by regional power blocs – dominated by the US and China – which risked wiping out trillions of dollars in global output.

“If we descend into Cold War two, knowing the costs, we may not see mutually assured economic destruction. But we could see an annihilation of the gains from open trade,” she said.

Apocalyptic scenarios

Australia is not immune to these risks but independent economist Saul Eslake told news.com.au that he wasn’t convinced the “apocalyptic scenarios” being floated would play out globally.

“While it’s been the fastest tightening of interest rates in 40 years in the US, the US economy grew by 3.1 per cent without the assistance in a surge of migration like in Australia and the unemployment rate remained under 4 per cent,” he said.

“Given it’s unlikely there will be further increases in interest rates anywhere and cental banks — not the Reserve — but the US and Europe hint the next movement in rates will be down, it’s hard to see what might precipitate the apocalyptic scenarios that people are now talking about.”

Mr Eslake said he struggled to see why others were “fearful” of the worst downturn since WWII and overall Australians had coped well with interest rates skyrocketing.

Interest rates

Although he acknowledged rents were still a concern, with the pressure on rental prices showing no signs of slowing down.

He added that “despite all the fearmongering” and the serious difficulties people with big mortgages are encountering – especially those who believed former RBA boss Phil Lowe that rates would remain at record lows until 2024 — he said Aussies had coped remarkably well with interest rate rises.

“There’s been no serious rise in defaults or delinquencies and although consumer spending slowed a lot, clearly it hasn’t tanked and it hasn’t gone negative – partly as there are a lot of consumers thanks to the surge in migration,” he explained

“The Australian economy is travelling OK, with the unemployment rate, in almost every month since the Reserve started hiking rates, remaining below 4 per cent which is a remarkable achievement.”

However, he said there were “obvious risks of a further deterioration of the economic situation in China” which would impact Australia given its reliance on it for exports.

Australian’s household finances were also being battered by a rising personal tax burden and electrical and gas prices, but these could be slight relief in sight, he added.

But overall Mr Eslake said the global economy was in a better position compared to 2023.

“I suspect the risks are less than they were this time last year, every man and his dog were the forecasting the US and others would have a recession and it didn’t happen,” he said.