In the media

The new threats to the economy

By Jonathan Gillham

Dagens Industri

10 June 2023

PA’s Chief Economist, Jonathan Gillham, comments on the new threats to the economy in an article in Dagens Industri. The article lists six new financial risks after the recent bank crashes.

The article outlines the emerging economic risks after three US and one European bank failed and Swedish SBB has ended up in trouble as they deal with a dramatic global shift from low interest rates to high inflation and rising interest rates.

1. Persistent price increases

Many analysts had hoped that the interest rate rises would be over by mid-year. But continued price increases in both the EU and the US are creating uncertainty and the risk of entrenched inflation. The article reports warnings from the United States where a Bank of America survey found almost nine out of ten managers predicted that the coming year will be characterized by stagflation, i.e. high inflation but low growth.

The biggest risk for Europe is fluctuating price increases in the euro area, which make the current terrain particularly difficult for the ECB. A 'one size fits all' monetary policy will obviously create some winners and some losers. The situation is perhaps more serious in the UK, but I think it's a good test of what will happen in the rest of Europe”
PA chief economist expert

The article underlines that both Europe and the US are facing difficult trade-offs if they are to succeed in bringing down inflation without hindering the economy.

2. Nervousness in the real estate sector

The second threat to the economy is in the real estate sector with plummeting valuations of office buildings in Berlin, Paris and London, as well as reductions in demand for new mortgages. In the UK, real estate company British Land has fallen out of the FTSE 100 index, with a 34 percent fall in its share value and Canary Wharf Group has been downgraded from junk status Ba1 to the even lower grade Ba3.

The situation is perhaps more serious in the UK, but I think it's a good test for what will happen in the rest of Europe in the years to come.”
PA chief economist expert

3. Mini bubble in artificial intelligence

The article goes on to explain the risk of a bubble in tech stocks. While these have outperformed in the first half of the year, this has been driven by the hype around artificial intelligence, AI. This AI frenzy is similar to the dotcom bubble of the early 2000s and companies also face risks from a continued high interest rate environment.

4. British credibility problems

The fourth economic threat comes from the UK, where inflation in April was 8.7 percent, higher than analysts' expectations and the highest of all countries in the G7. This is considered serious because many British households, like the Swedish ones, have mortgages with short repayment terms.

Other pressures come from post-Brexit labour shortages driving inflation in the medium term, and the Bank of England's forecasting failures creating credibility problems. In addition the UK general election, due to be held by January 2025, has also raised concerns about new political risks.

5. Stress around corporate bonds

The article outlines a further economic threat from corporate loans The European market for leveraged loans is worth around EUR 1,000 billion, (SEK 11,600 billion). Extremely favorable loan terms in 2021 meant that many companies chose to reschedule their loans then, which provided a buffer when interest rates began to rise.

The US market for leveraged loans is significantly larger. The value of the outstanding corporate bonds alone amounted to over SEK 110,500 billion at the end of last year. However, many companies rescheduled loans in 2020 and 2021, which led to lower issue volumes this year.

This means next year could be harder if they need to refinance and ongoing high interest rates could lead to defaults on corporate bonds increasing. The article suggests the healthcare and pharmaceutical sectors are seen as particularly vulnerable, followed by the retail and telecom sectors.

6. Blow to services and consumers

Manufacturing is struggling on both sides of the Atlantic. In the US, leading indicators such as the purchasing managers' index have indicated the threat of recession and some large retailers have lowered their forecasts reflecting the pressures on consumers. In Europe, there are signs of companies under pressure, despite them managing the winter energy price crisis better than expected.

The services sector in Europe has shown strong results. However, the article highlights uncertainties about the ability of the sector to maintain its stronger position and of a recovery in the manufacturing.

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