When George Osborne was offering his post-match analysis in the bleary aftermath of the Tories’ stunning victory on Friday morning, he singled out the Greek debt crisis as the first challenge he will face on returning to No 11.
Both Osborne and Balls, his Labour opposite number, fought the general election campaign as though whoever won would be entirely the master of Britain’s economic destiny. Yet chancellors are always to some extent the prisoners of outside events; and the new government, with its slim majority, could be buffeted by any of a series of threats in the global economy.
Simon Wells, chief UK economist at HSBC, says: “There are huge global risks, and to a large extent any chancellor is going to be a passenger on that journey.” Those big risks are:
Grexit
A full five years after Britain’s last general election was played out against the background of an emergency bailout for Greece, the threat of a Greek departure from the European single currency – known as “Grexit” by investors – is once again casting a shadow over Europe’s economies.
Alexis Tsipras’s radical-left Syriza government in Athens is battling to square the circle between an electorate that has been promised an end to austerity and Greece’s international creditors, who are insisting on stringent economic reforms before they will release €7bn of much-needed bailout cash.
The latest round of talks will take place on Monday, just a day before Greece has to find the cash to make another payment – of nearly €800m – to the International Monetary Fund.
Neither side wants to see Greece plunge out of the euro. But with evidence mounting that Athens really is running out of cash – it recently had to temporarily delay millions of pension payments, and bills for hospital supplies are now going unpaid – there seems to be a growing risk of a default, which could well be followed by departure from the euro area.
Eurozone politicians insist they are better prepared for the Greeks to leave than they would have been five years ago, with a European Central Bank rescue plan in place for member-country governments struggling to finance their debts; but in the short term, market chaos – always a significant risk for the UK, with its disproportionately large financial sector – would be highly likely.
The collapse in confidence that would follow a Greek departure could also hit demand and depress growth right across the eurozone – a risk for British firms dependent on exports to this key market.
US slowdown
The latest GDP figures for the United States suggested that the economy slowed down sharply at the turn of the year, expanding at an annual rate of just 0.2% in the first quarter of 2015.
Economists were quick to explain away the downturn as a temporary blip, caused by February’s freezing weather and the shutdown of shale gas rigs as a result of global oil prices plunging (they have since recovered some ground).
There have also been tentative signs in recent weeks that wage growth may finally be starting to pick up.
But some US experts – including Harvard’s Larry Summers, a former US treasury secretary – have warned that America will struggle to achieve a robust, sustainable recovery because the prevalence of insecure, low-wage jobs means that consumer demand will continue to be weak: a theory known as “secular stagnation”.
The cliche that when America sneezes, the world catches a cold is not as true as it once was; but the US remains the world’s largest economy, and a huge market for consumer goods. A slowdown across the Atlantic would be bad news for Britain’s exporters.
China crash
Experts have long warned that China’s vast economy may be facing a “hard landing”, and some see the recent crash in global oil prices, as well as in other commodities, including iron ore, as partly a reflection of weakening Chinese demand.
“I’m more worried than I’ve ever been about China,” says Russell Jones of Llewellyn Consulting. With property prices falling sharply, and exports collapsing, he says, “the problems are multiplying, and the risks of a policy mistake are growing”.
The coalition has made forging strong economic links with China a priority, even incurring the wrath of Washington by signing up to Beijing’s plans for a new Asian infrastructure investment bank. Despite Osborne’s – and Vince Cable’s – best efforts in the last parliament, China is still not a major market for British businesses: but if the authorities in Beijing decided on a drastic devaluation of the yuan, for example, exporters around the world would be hit — and potentially spark market chaos.
Commodity prices would also be likely to plunge if Chinese growth continued to weaken. “If China hits a pothole, we’re all going to be paying a huge price,” says Jones.
The bond bubble bursts
Central banks around the world – most recently in the eurozone – have bought billions of dollars of bonds since the crisis, in an effort to drive down interest rates, which tend to move in the opposite direction to bond prices, and kickstart growth.
In Europe, an extraordinary €2 trillion of government bonds from “safe haven” countries, such as Germany, even have a negative yield – meaning, in effect, that investors are paying governments for the privilege of lending to them. “European interest rates are very, very odd,” says Simon Derrick of investment firm BNY Mellon. “It’s almost Through the Looking Glass.”
City investors may have been watching the general election on Thursday, but they also kept half an eye on the drama unfolding on eurozone bond markets. German bond yields shot up, raising fears that a day of reckoning for investors had come; but they plunged later in the day.
Analysts observed that the rollercoaster trading was a mere foretaste of what could follow when the bubble does burst.
No one knows what the trigger will be – perhaps the US Federal Reserve’s first interest-rate rise since the crisis, which could come later this year – but at some point the wall of money that has poured into bonds is likely to be reversed, potentially sending borrowing costs, and the euro, lurching higher.
Jones points out that a US rate rise, even if carefully signalled in advance, could have knock-on effects in some emerging countries that have been borrowing at low interest rates in dollars since the crisis. “The emerging markets could experience some financing difficulties,” he says, singling out Brazil, Mexico, Turkey and South Africa as countries at risk.
“Nobody ever knows what bursts a bubble,” says Derrick. The potential impact for the UK would be hard to predict, but banks’ balance sheets could be hit hard, and market turmoil would surely follow.
Oil prices jump
The sharp decline in the global oil price, from $100-plus a barrel last autumn to just $50, came as an exquisitely timed fillip for the Conservatives. Inflation dropped like a stone, hitting zero in March and finally reversing the extended decline in living standards that had been the hallmark of the UK’s recovery from recession.
Oil prices – over which no chancellor has any control – have already started to bounce back, and were close to $70 last Wednesday, before falling back slightly at the end of the week.
Few analysts are predicting a rapid return to $100 – barring a conflagration in the Middle East – but plunging inflation has delayed monetary policymakers on both sides of the Atlantic from getting started on “normalising” interest rates – that is, raising them.
A gradual rise in the oil price would be manageable; a sharp jump would increase the risk of turbulence ahead.
Geopolitical threats
With hostilities in Ukraine rumbling on and the battle against Islamic State far from over, there is always the risk that one of the world’s simmering conflicts will burst into life.
As well as creating diplomatic and political headaches for the new Tory government, geopolitical events could wreak havoc on the global economy. Oil prices would surge if conflict intensified in the Middle East, for example – with painful consequences for western consumers. “The world is still quite a dangerous place, whoever is going to be in No 11,” says Jones.
