US, Australia, China and Europe slowdowns facing different challenges

Equity markets around the world are volatile amid fears of a slowdown. Picture: Scott Olson/Getty Images/AFP

Over the decades most global downturns have been caused by one major world event with similar repercussions spreading around the world.

But in 2022, while the pandemic and the over stimulation that followed was the base cause, the consequences that have unfolded are very different.

We face the clear danger of a global downturn driven by four separate national calamities. The US, Australia, China and Europe are each encountering very different crises, so the outcomes will be different.

Both the US and Australia have current inflation running at around the 8 per cent mark and both are lifting interest rates to lower economic activity to curb that inflation.

But in the US those that bought houses in the last few years are insulated because their agreements mean there has been no change in their mortgage payments.

They will continue to enjoy the token interest rates for years under the terms of their long-term loans. But high interest rates hit consumer spending — particularly among renters — and, of course, new loans are much more costly, which hits building and lowers dwelling prices.

Housing pressures in Australia are being exacerbated by the current crisis. Picture: Lisa Maree Williams/Getty Images

The situation in Australia is different because our banks went on a lending spree during the Covid-19 stimulation so around 30 per cent of our mortgages are in danger of becoming stressed.

Almost all were issued in the last two years on flexible rates or on very short fixed-term arrangements.

Those set to be hit include many in the middle class who upgraded their homes on high mortgages and/or have negatively geared investment properties.

As house prices fall many face the likelihood of negative equity situations where the loans total more than the dwelling is worth.

The building industry is in crisis, with vast segments completing fixed price contacts at huge losses, and the Australian Taxation Office continues to unfairly hit family business.

Accordingly, it will take much higher interest rates in the US to lower economic activity and curb inflation than will be required in Australia.

As a result the Australian dollar is falling, which will underpin our inflation and may force the Reserve Bank to bring interest rates into line with what markets are demanding — interest rates that are higher than those required to reduce economic activity.

It’s a dangerous time.

The new UK Prime Minister plans to lower taxes, which will also lower the currency and create a similar situation to Australia.

The European crisis pivots on energy shortages and high prices because Russian gas is no longer available as a result of the Ukraine war.

The European crisis is illustrating the importance of energy resilience and reliability and showing how pivotal energy-intensive industries are for powerhouse economies like Germany.

Coal plants in Europe, like this one in Germany, are being reactivated to deal with the energy crisis. Picture: Ina Fassbender/AFP

The soaring gas and electricity prices make the costs of making steel, aluminium, glass, or fertiliser in Europe exceed what those products can be sold for, which forces closures. Customers in those industries producing cars, machinery, beer and food are scrambling for other sources of economic raw material or are also closing down.

Apart from reactivating old coal plants, and continuing to run nuclear plants scheduled for closure, Europe is installing some 20 LNG import terminals. But LNG is much more costly than gas piped to Europe and the lower euro also boosts the costs and underpins inflation. Europe’s downturn will be severe as many of its industries will not be able to compete globally.

Europe aims to be a world leader in decarbonising energy sources but the capital costs of wind, solar and other facilities are enormous and it is now questionable whether Europe can generate the wealth necessary to provide the capital for the investment. And for industry, wind and solar often require costly back-up investments such as batteries or gas powered electricity generation.

China has none of those inhibitions and can sense an opportunity to base its economy on low-cost energy.

It is ramping up its coal driven power stations and is enjoying cheap Russian gas. China is also a world leader in nuclear technology that does not create the waste.

The actual China downturn is caused by the policy of the Chinese government to try and eliminate Covid-19 in the nation.

In most of the parts of the world activity is returning to normal, but China still has regular and big Covid-19 shutdowns which are substantially reducing its economic activity.

While Covid-zero restrictions are stemming growth in China. Picture: Hector Retamal/AFP

At the same time it has a crisis in its banking community, which has loaned vast sums to apartment developers that are in deep trouble.

There are a large numbers of apartment blocks that are not completed and dormant but where buyers are still paying instalments.

The Covid-19 and bank/building crises are causing considerable problems in China. But China does not have an inflation problem.

And although the lower economic activity in China and the order cancellation by US customers feeling the impact of higher American interest rates is impacting industry, it is also reducing the supply chain problems that triggered major difficulties around the world.

There is little doubt that the global downturn we are now experiencing is going to intensify, but its outcomes will not be uniform as each nation grapples with a different set of problems.