Adam Tooze has a cult following among economists and historians alike.
The famed English economic historian, once hailed by New York Magazine as “impeccably credentialed, improbably charming”, is in Australia after speaking at Sydney’s Festival of Dangerous Ideas.
The decision by the US Federal Reserve to raise its key interest rate by another 75 basis points this week, and its plans for further increases, have raised the spectre of a global economic slowdown.
Overnight, the Bank of England lifted its key rate by 0.5%, matching Indonesia and the Philippines, while the Swiss National Bank and South Africa opted for a 0.75 percentage point rise.
Tooze, a history professor at New York’s Columbia University and a frequent contributor to the Guardian, has detailed the gathering economic headwinds and has analysed for Guardian Australia the key areas of the current financial turmoil.
‘Extremely severe’ recession risk
The chances of a global recession were now “extremely severe”, as central banks in many parts of the world raise interest rates to curb inflation.
“It’s the single most dramatic simultaneous tightening of monetary policy ever,” Tooze said.
The winding back of Covid support packages by governments as the pandemic tide recedes also meant fiscal brakes were being tapped.
“US fiscal policy right now is massively contractionary,” Tooze said. “It’s a 4.5% of GDP negative drag.”
Textbook moment of ‘failed technocracy’
Tooze predicted the current policies of central banks and governments would be marked in future textbooks as a “classic moment of failed technocracy”.
The US Fed Reserve lifted its cash rate target range by 75bp to 3% to 3.25% on Wednesday, US time. It also indicated it expected increases of as much as another 125bp this year even as Fed chairman Jerome Powell warned of a possible recession.
Tooze said other central banks will be under pressure to follow. Australia’s Reserve Bank governor, Philip Lowe, said last week the bank would probably lift its cash rate 25bp or 50bp on 4 October, making it a record six increases in as many months.
Ahead of the US Fed's 75bp rise in interest rates overnight, investors were predicting Australia's cash rate to peak at almost 4% by next May, up from 2.35% now. They are still rating another 50bp RBA hike next month as a 3-in-4 chance. pic.twitter.com/wGElMpjCwF
— Peter Hannam (@p_hannam) September 21, 2022
The lives of 100s of millions of people and their employment prospects would be scarred by a recession, Tooze said: “This will mark those people’s lives for the rest of their lives.”
Australian fallout
Private economists forecast Australian property price falls of as much as 20%, the steepest decline since the 1980s as rates rise.
Tooze said Australia and Canada had two of the “most overheated” property markets in the world, and he predicted “huge effects” from higher borrowing costs.
One source of support for the market might also be less forthcoming in the future.
The surge in both Chinese students and property buying in Australia, US and elsewhere, had partly been a “capital flight story”, he says. Buying a flat to provide accommodation while studying was one way to get money out of China.
Signs have lately been mounting of a renewed effort by Chinese to move money abroad ahead of a major Chinese Communist party meeting in Beijing next month that will formally extend the leadership of President Xi Jinping.
To counter that capital flight, authorities are making it harder for people “beyond certain networks” to access passports, Tooze said. “It’s really quite difficult now for the Chinese to discreetly exit.”
China worries
The RBA deputy governor, Michele Bullock, on Wednesday described the global economy as being “on a bit of a knife-edge”.
One reason was the fragile state of China’s economy. Its Covid-zero policy disrupted supply chains and a plunging property market had “still not worked itself out”, she said. Demand for Australian iron ore, in particular, hinged on the success of government efforts to support real estate.
“The Chinese property bubble is not just any property bubble – it’s the largest single phase of accumulation of wealth in economic history,” Tooze said, noting the number of private property owners had jumped from near zero to 300 million in a few decades.
“They poured more concrete in three years [in the early 2010s] than the United States in all of the 20th century,” he said.
The Chinese government may yet stabilise the market.
“The amazing thing is that big money in the west is taking a huge gamble on the capacity of an authoritarian regime unfettered by the rule of law to pull off the largest single exercise in macro-prudential, macro-financial stabilisation the world has ever seen,” Tooze said.
Assuming they can do that, BHP, Rio Tinto and Fortescue – and a large part of the Australian economy – “are all fine”.
One cause for optimism
Tooze said the “extraordinary progress” in cutting the cost of solar and wind energy was a “real case for optimism”, at least as far as action to limit global heating was concerned.
“The disappointment is we could be even further down those cost curves” if the US and Europe and elsewhere had matched China’s investment. Improving battery technology would be “fundamental” to advancing decarbonisation efforts because of the intermittency of renewables.
He cited data from the International Energy Agency on total public funded energy research – totalling $US23bn ($A35bn) in 2021 – as proof we can do more.
“If we were serious about the energy transition,” he said, “you’d think we would be collectively spending more than what Americans spend [each year] just on treats and food for their dogs and cats”.
