HSBC economist Stephen King has likened the world economy to an ‘ocean liner without lifeboats’. His dire warning (first reported in the UK Telegraph) comes as the world economy zig-zags through a field of monetary icebergs.

Interest rates across developed economies have fallen to near zero, leaving governments with no room to move for further stimulus spending.

“In effect, the world economy is sailing across the ocean without any lifeboats to use in case of an emergency,” wrote Mr King in a recent report.

The greatest threat is posed by China’s weakening economy. Should authorities be left with no choice but to devalue the renminbi the knock-on effects will be severe.

“(Should this happen, falling) commodity prices will lead to severe weakness elsewhere in the emerging world. The dollar will surge, but the Fed will be unable to respond via interest rate cuts. The US will eventually be dragged into a recession through forces beyond its control.”

Most guesses hold that China‘s economy is worse than authorities are letting on.

To put it in perspective, said Andrew Roberts, an economist with RBS, to the Telegraph, China accounted for 85 per cent of total global growth in 2012, 54 per cent in 2013, and 30 per cent in 2014. Economists are predicting that to fall to 6 per cent this year.

“If there’s only one statistic you need to know in the world right now, this is it.”

The US Federal Reserve has cut interest rates by at least 5 per cent during every recession since the 1970s. With interest rates currently flat-lining, that’s no longer an option.

“But at the same time,” says Mr King from HSBC again, “budget deficits are still uncomfortably large and debt levels uncomfortably high.”

The hard recessions of the past have typically been followed by strong recoveries. These recoveries have become progressively weaker; with the last one being “more L-shaped than V sh-shaped.”

Mr King argues that “today’s inflation isn’t just low. It is arguably too low.”

Dealing with recessions is a lot more difficult when debt levels are high and interest rates low (as they are now). Economies have no ammunition with which to tackle the problem because economic activity is sluggish and no real wealth is being created.

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