There are several significant risks unfolding across the global economy. Higher oil prices from the war with Iran, persistent inflation, pressure on central banks to raise interest rates, rising bond yields and stress in parts of private credit. Each is a material concern in its own right. My greater concern is what happens as they begin to reinforce each other.
Oil is the most immediate pressure point. Its influence extends well beyond the petrol bowser. Higher energy costs flow through freight, manufacturing, agriculture, and the logistics behind almost everything we consume. Businesses will either absorb those costs or pass them on. Either way, someone pays. Margins fall, household purchasing power weakens, and an economy already dealing with stubborn inflation faces another obstacle.
That puts central banks in a difficult position. Higher interest rates don’t reopen a shipping route or produce more oil. But they will reduce spending elsewhere in the economy. If higher energy costs become embedded in broader prices and inflation expectations, central banks may well hike rates further, even as growth slows. The risk is that controlling inflation ends up delivering more economic pain than markets have allowed for.
Bond markets add another layer. Rising yields increase borrowing costs for governments and businesses, while also placing pressure on asset valuations. They also make refinancing more difficult. A business might manage its existing debt today but face a very different calculation when that debt matures. These pressures take time to work through the system. The absence of an immediate crisis does not mean the consequences have been avoided. There are material problems brewing here.
Private credit deserves particular attention in that environment. Many borrowers face interest costs that rise with market rates, making them vulnerable when financing becomes more expensive. If earnings also weaken, the squeeze comes from both directions. This is a sector I have long been concerned about. The economic conditions now emerging will likely expose more of its underlying weaknesses.
That does not mean every private credit fund is in trouble, that a bond crisis is imminent, or that a global recession is inevitable. An easing of the conflict could also relieve energy pressure and improve the outlook. But with the US midterm elections approaching, political calculations on both sides could complicate efforts to resolve the conflict.
The point is that the risks to the global economy are not only mounting, but they are also converging and beginning to reinforce each other. Higher oil prices sustain inflation. Persistent inflation keeps interest rates elevated. Higher borrowing costs weaken cash flow. Weaker cash flow increases credit stress. If lenders then become more cautious, businesses find it harder to access capital, adding another constraint to growth, potentially creating a downward spiral.
We do not need to predict a specific breaking point to recognise that the margin for error is narrowing. Individually, these risks are significant. Collectively, they threaten the global economy because each can make the others harder to manage.
For investors, this is a time to remain disciplined and manage your portfolio prudently. Strong balance sheets, low levels of debt, reliable cash flow, and sufficient liquidity become far more valuable when conditions tighten. While markets appear to underestimate these risks, we continue to take profits on selected stocks and build our cash holdings.
General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.