China, the world's second-largest economy and a key driver of global growth in recent decades, is grappling with what the economist terms a "perfect storm" of problems. The country's housing market, long a pillar of its economic miracle, is facing trillion-dollar headwinds. Simultaneously, the banking system is under strain, with falling confidence leading to deposit flight and funding pressures. Corporate sector cashflow and investment are weakening in the face of a credit crunch. Even the stalwart export sector is slowing.

These issues, compounded by recent fiscal tightening, point to a protracted slowdown in China that could last several years. Given China's outsized role in driving global demand since the 2008 financial crisis, the spillover effects could be significant, impacting everything from German machinery exports to Australian commodity shipments to enrollments at overseas universities. Capital flows are also likely to reverse as China's previously massive trade surpluses dwindle, with far-reaching implications for global financial markets.

For resource-dependent Australia, China's woes are already being felt. But domestic factors are also at play, with rapid population growth suppressing wages while stoking inflation in sectors like housing. The result has been a historic squeeze on household disposable incomes. Australians are increasingly reluctant to borrow from the future to fund present consumption, a mindset shift with major implications for spending and growth.

In response, the Reserve Bank of Australia may need to cut interest rates faster and further than currently anticipated, even at the risk of higher inflation. This could put downward pressure on the Australian dollar. Longer-term, boosting productivity—whether through education reform, red-tape reduction, or seizing opportunities in green energy and AI—is seen as crucial to bolstering real incomes and tackling challenges like housing affordability.

The United States, while currently on a stronger trajectory boosted by fiscal stimulus, is not immune to these global crosscurrents. By early next year, inflation pressures could re-emerge, pushing bond yields higher and tightening financial conditions. This could deflate the liquidity-driven boom in US assets and usher in a slowdown by mid-2024.

Hunt highlights the growing co-dependency between liquidity and asset prices, particularly in leveraged sectors like private equity, as a key risk. In a world of collateralised lending, tighter liquidity can quickly cascade into falling asset values and fire sales, with destabilising economic consequences.

Looking ahead, the global economy appears to be entering a challenging period, with China's slowdown set to reverberate worldwide just as other key engines like the US and Europe face their own headwinds. Policymakers will need to walk a tightrope between supporting growth and containing inflation and financial risks. But as the economist stresses, the real long-term solution lies in reigniting the productivity growth that underpins rising real incomes—a complex alchemy of invention, investment, and sound policy that is easy to prescribe but hard to achieve.