“A surge in food and fuel prices is raising pressure on governments around the world to pick up the tab for consumers,” says The Wall Street Journal. “Spooked by protests that have broken out recently from Bangkok to Sicily, many governments have adopted subsidies or tax breaks to shield households and businesses.”
Yet these handouts are causing government deficits and debt to balloon, just as borrowing costs are rising. In the eurozone, for example, governments are likely to run budget deficits of 4.5% of GDP on average this year.
Governments have become used to the idea that ever-higher spending is both “manageable and sensible”, says Mike Dolan on Reuters, thanks to years of low inflation and low interest rates. This assumption will now be tested by a sharp shift in the economic environment.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
“In a one-two punch, pandemic lockdowns first floored borrowing rates and exploded government borrowing to prop up economies. But a rush to reboot created wild price distortions and supply bottlenecks that appear persistent and have now been exaggerated by an energy and commodity price squeeze since Russia invaded Ukraine.”
Interest rates are likely to rise in response, increasing the cost of carrying so much public debt, says asset manager Janus Henderson. Global government debt rose to $65.4trn in 2021, up 7.8%, with every country increasing its borrowing.
Yet interest costs were just $1.01trn – equivalent to a record low interest rate of 1.6%. In 2022, debts will rise further – to a forecast $71.6trn, up 9.5% – while higher rates will raise interest costs by an estimated 14.5%. The UK will see an especially sharp rise, because inflation-linked bonds account for around 25% of outstanding government debt.
• SEE ALSO: The bond-market bloodbath isn’t over yet
-
8 of the best properties for sale with indoor swimming poolsThe best properties for sale with indoor swimming pools – from an award-winning contemporary house in East Sussex, to a converted barn in Hampshire
-
Chinese stocks slump on first trading day of 2025Chinese stocks suffered in the new year from their worst first day of trading since 2016, despite a state stimulus package
-
MoneyWeek's five predictions for investors in 2025MoneyWeek's City columnist gazes into his crystal ball and sees five unexpected events in store for investors in 2025
-
Elon Musk to Taylor Swift - the four key figures who moved markets in 2024We look at the four most influential people in 2024 who moved markets – from Elon Musk reshaping US politics to Rachel Reeves struggling as Britain's chancellor
-
Will AI be the future of advertising?It remains to be seen, but the idea that AI providers can make money from advertising does not bode well
-
Why undersea cables are under threat – and how to protect themUndersea cables power the internet and are vital to modern economies. They are now vulnerable
-
Rouble hits two-year low against the dollar – what does it mean for Russia's economy?New US sanctions have plunged the rouble to its lowest level since 2022. Why are investors spooked and how will this affect Putin's economy?
-
Has Javier Milei succeeded in transforming Argentina's economy?Javier Milei won an election last year on an “anarcho-capitalist” platform, promising to take a chainsaw to the overbearing and bloated state. How’s it going?
-
Brazil booms – but why do investors remain wary?Brazil is booming, but you wouldn’t think so from looking at the stock market. What's behind the market paranoia?
-
German chancellor Olaf Scholz's coalition collapses – what went wrong?EU Economy After Olaf Scholz fired a key minister, Germany's coalition has collapsed. But political turmoil in the country couldn’t have come at a worse time
