Retail inflation and wholesale inflation in the US were measured a few days ago at the highest level in the last several months, above the estimates of economists and stock analysts. A significant rise has also occurred in inflation measurements in Europe and other regions of the world. It doesn't take much to understand the cause of this rise.
The Middle East war is halfway through the third month and nothing shows that the return of the global fuel market to normality will happen quickly. When the Straits of Hormuz are fully opened and without any obstacle, the flow of crude oil, LNG and the various by-products will be very late to reach pre-war levels. The most likely thing is that this will take over a year, perhaps more, as damage to energy infrastructure is quite significant and even in installations that have simply ceased operation, their activation is a matter of several weeks.
Also, we must not forget the fact that all the cargo that had started from the Persian Gulf in the last days of February has already reached their destinations. And that the stocks that have been available for weeks to deal with the lack of several million barrels of crude oil, the cargoes of LNG from Qatar and the UAE, the large quantities of petrol, diesel, air fuel and many other products that remain trapped in the Persian Gulf will eventually be exhausted. Based on logic, this means that the prices of liquid fuels of all kinds, gas, petrochemicals, plastics, etc. will remain high for several more months.
For months to come, there will continue to be shortages and general disruptions in many supply chains and other products that play a crucial role in many industrial processes, such as the sun needed in the microprocessor industry and the sulphuric acid used in the copper industry, as analyzed yesterday by Mary Veneti (The copper rally, short-term risks and the dual agent of Hormuz | Liberal. gr). So the way things are going, for several months we will still have increased inflation when in many sectors of industry the supply chains are not working properly.
Increased growth will eventually also start to affect consumer demand, gradually reducing economic growth in most sectors of the economy. Without being able to be sure that things will turn out that way, we must point out that this combination strongly reminds the definition of stagnation.
There are other developments potentially threatening to the international economy. We are talking about large and increasing budget deficits in many states and the state of the international bond market. In the US public debt has exceeded 100% of GDP and it is predicted that by 2030 it will have reached 107%, surpassing the high that had occurred immediately after World War II.
In Japan, net public debt is at 200% with growth trends, while in Europe the situation in France and Italy is worrying, and German public debt has also begun to rise. In China subsidence in the real estate sector has raised the obligations of the central government and local governments vertically. The increase in defence spending around the world and the need to carry out major infrastructure projects with state support are only two factors that ensure the continued further increase of state funding needs over the coming years.
In the current circumstances, major fiscal deficits are a more serious threat to the economy than it was until now. For some years the reference rates and yields of government and corporate bonds have risen significantly, making the service of existing loans more expensive. As we saw about a week ago (Bonds: The new black swan in the markets | Liberal. gr), there are already serious concerns about the situation of the US sovereign bond market, as public debt is very large and constantly increasing and doubts arise over the possibility of the US public serving it easily in the coming years. These concerns grow every time American bond returns rise.
Last Wednesday, at the 30-year bond auction, the interest rate was set at 5.046%, in Bloomberg the highest since 2007. Something similar happened in the United Kingdom, where ten-year government bond yields were found Wednesday near the highest level since 2007, at about 5.10%. The situation in Japan is similar, where the performance of the 10-year bond is close to 2.63% which has been the highest level since 1997.
The rise in yields is, of course, also related to the rise in inflation which has caused investors to expect a rise in interest rates from many central banks in their efforts to harness it. Despite very intense activity in the corporate bond sector, it is evident that there are several concerns there too. In yesterday's Bloomberg article we saw that Alphabet, Google's parent company, has borrowed from international markets about $60 billion since the beginning of the year and plans to borrow more soon.
The interest here is not that these publications were easily covered, as the company's financial situation is excellent, but that most of them were made in currencies outside the US dollar. Reading the article we understand that the company has chosen to move outside the US and to address international investors to a large extent because it is afraid that if it tries to borrow only in U.S. dollar, the market will bend sometime as well as the other technological giants have similar huge bond issues programs.
Thus Alphabet, Amazon and the group's other companies are trying to borrow from around the world trying not to kneel the American market under the weight of the many hundreds of billions that are to be borrowed only within 2026. However, this creates the risk of saturating the rest of the international markets if publications continue for a long time with the same intensity.
Returning to the global economy, the risks are very clear. The rise in inflation will become even more threatening as the blockade of the Straits of Hormuz continues to reduce consumer demand, hitting the profitability of businesses that see their operating costs rising and ultimately putting a brake on economic growth.
With the government bond market under pressure due to the high financial needs of the public sector which is a consequence of high and rising deficits and the corporate market starting to worry about the large volume of bonds issued to finance investments in Artificial Intelligence, it is not at all difficult to imagine a sudden rise in their yields.
If that happens, the consequences will be very negative for the economy, as the private sector will be affected at the same time, at an individual and corporate level, and the public. In theory, in such a threat to economic growth, central banks could intervene by reducing reference rates to stimulate the economy.
But with inflation on a clear rise, this will be almost impossible and the exact opposite will not be possible. In short, we cannot rule out the possibility of reaching an almost dead-end situation where the world economy, businesses and citizens are ultimately victims. We do not claim that this is the most likely possibility, but it has a real chance of being realized.
