Fears global recession to occur in 2023 as ‘financial earthquake’ looms

The world’s leading expert on a particular type of financial crisis has issued a chilling warning, predicting a possible “global event”.

There are fears a “financial earthquake” causing widespread distress is going to hit globally, with a warning issued by the world’s leading expert on debt crises.

The rapid rate of interest rates rises across the globe, with eight consecutive hikes in Australia alone taking it from a record low of 0.1 per cent to 3.1 per cent in December, could cause a chain reaction of financial crises across the world.

Add to that the US government could default on its debt as soon as June, when the “extraordinary measures” brought in to stave off the crisis are no longer enough to manage a $US30 trillion bill that is ticking upward.

“The combination of recession and rising real interest rates is very dangerous,” Harvard professor Ken Rogoff, a former chief economist at the International Monetary Fund, told The Telegraph.

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Major US banks reported mixed fourth-quarter results as executives pointed to the rising odds of a "mild recession," with inflation and interest rate hikes challenging households and businesses. Picture: Daniel Slim / AFP

He believes the globe only narrowly avoided financial catastrophe in 2022 and our luck could run out this year.

“We were very fortunate that we didn’t have a global systemic event in 2022, and we can count our blessings for that, but rates are still going higher and the risk keeps rising,” he added.

“The risk of over-tightening by the European Central Bank is nothing less than catastrophic and they need to be very careful. Italy is extremely vulnerable.

“But this could pop anywhere. Global debt has gone up massively since the pandemic: public debt, corporate debt, everything.”

Unusually, it could be Japan that triggers a global cascade of pain. The country has had no interest rate rise in 30 years, while its public debt is 260 per cent of GDP, according to Prof Rogoff, meaning any hike could send its economy into a tailspin and have a knock on effect elsewhere.

Kenneth Rogoff, professor of economics at Harvard University. Picture: Jason Alden/Bloomberg

Japan is the world’s largest creditor with $US3.6 trillion of external net assets, while it also owns 8 per cent of France’s public debt.

Corporate leaders and economists – along with the World Bank – have also warned a global recession is likely to happen in 2023.

A survey of more than 4440 business leaders at the end of last year showed 73 per cent predicted global growth to decline over the coming 12 months – the worst forecast since PricewaterhouseCoopers began polling in 2011.

Recession fears are growing. Picture: Spencer Platt/Getty Images/AFP

It also found two out of five leaders even expressed concern their companies may not last a decade if they are unable to adapt to concerns over supply chains, climate change and technology disruptions.

However, in good news for employees, 60 per cent of companies do not plan to make staff cuts and 80 per cent will not freeze salaries, particularly as unemployment remains low and competition for workers is still high.

Business leaders’ confidence in their own companies’ growth prospects dropped the most since GFC in 2008, with the top three concerns including inflation, macroeconomic volatility and geopolitical conflict weighing heavily, the survey revealed.

The world's political and business elites gather for the annual Davos summit to promote "co-operation in a fragmented world", with war in Ukraine, the climate crisis and global trade tensions high on the agenda. Picture: Fabrice Coffrini / AFP

Meanwhile, the World Economic Forum’s annual meeting began in Davos this week and its survey of chief economists found two thirds expected a worldwide recession in 2023 as businesses cut costs, while 18 per cent thought a downturn was “extremely likely.”

It comes as a new report highlighted inequality as it found globally, the richest 1 per cent have made nearly twice as much money as the rest of the world put together over the past two years, it also found.

The richest 1 per cent of Australians have pocketed more than $2500 a second – or $150,000 per minute – for 10 years straight, analysis by Oxfam Australia found, and called for the super wealthy to be taxed more heavily.

Originally published as Fears global recession to occur in 2023 as ‘financial earthquake’ looms