2008 versus 2022: are we set for another Global Financial Crisis?

May we interest you in a game of ‘spot the difference’ this month? As the Federal Reserve continues to raise rates, prominent finance figures such as Nouriel ‘Doctor Doom’ Roubini warn of another looming financial crisis. Below we compare today’s environment with where we stood prior to the 2007-2008 Global Financial Crisis (GFC) across eight prominent macroeconomic metrics. In summary, while the inflationary backdrop, reduced fiscal bandwidth and heightened geopolitical risks are concerning, the comparative strength of the banking and corporate sectors, combined with a healthy labour market and a persistent housing shortage, suggest greater resilience.

1. Inflationary backdrop

One source of concern for bearish investors is that inflation is markedly higher than it was pre-GFC across most of the developed world (see chart). Indeed, persistent inflationary pressures mean that central banks are currently being forced to raise rates into a looming recession. It is worth noting that in contrast with most western countries, China still has ample monetary policy room to manoeuvre and is currently easing policy. Domestic inflation here is significantly lower than where it stood back in 2008.

Consumer price index – selected countries

2. Depleted fiscal ammunition

The sovereign debt overhang also appears more concerning today than it did in 2008. The US debt-to-GDP ratio has roughly doubled relative to 15 years ago (see chart), leaving the government with less fiscal firepower to support the economy in the event of a downturn. The problem is even more acute in parts of Europe: for example, Italy’s debt-to- GDP ratio has ballooned to 150%, from pre-GFC levels of nearer 100%. Moreover, while central banks around the world aggressively expanded their balance sheets during the GFC and again during Covid-19, the clear objective today is to shrink these holdings.

US debt to GDP ratio

3. Acute geopolitical risk

In contrast with 2008, when the threat of disaster was for the most part financial, the world currently faces much greater geopolitical risks. In 2018, Dario Caldara and Matteo Iacoviello of the Federal Reserve Board pioneered an index that charts the frequency of media articles mentioning geopolitical tensions. According to this index, illustrated below, risks today stand at levels last seen during the Iraq and Gulf Wars and 9/11.

4. US savings rate falling sharply

With two thirds of GDP in the world’s biggest economy driven by consumption, the health of the US consumer is key to the economic outlook. The personal savings rate hit an unnaturally high 33.8% during the Covid pandemic, but has since fallen to 3.1% as of the third quarter of 2022. This is the lowest quarterly print since 2008 and the eighth lowest since records began in 1947. As the higher cost of living eats into disposable income, credit card loans are also rising sharply. This signals that the ability of households to withstand further financial hardship is waning. That said, consumers are still sitting on excess savings of around USD 1.7 trillion built up during the pandemic.

US personal savings rate, %

5. Labour markets globally appear quite robust

While household savings have decreased, labour markets today look healthier than they did back in 2008 across the US, UK, Europe and Japan (see chart). In the US, unemployment remains near historic lows, and job openings near historic highs – nearly two for every unemployed person – a markedly more robust labour market than pre-GFC.

Unemployment rate, %

6. Banking sector and corporate resilience

The comparative resilience of the banking sector today versus 2008 is one of the most eloquent arguments against another financial meltdown. One of the main sources of financial fragility in the run up to the GFC was the aggressive awarding of credit to borrowers who did not have the capacity to repay. Following a swathe of regulations that sought to avoid another sub-prime loan crisis, banks have de-risked their balance sheets and the framework surrounding consumer finance products such as mortgages and car loans has been considerably tightened. As a result, the rate of delinquencies on US loans is much healthier today than prior to the GFC (see chart).

US commercial banks’ delinquency rate on all loans