CREDIT: TOM ARCHER/BARCROFT MEDIA
October 2016 – GLOBAL ECONOMY – Global debt has hit a record high of $152 trillion, weighing down economic growth and adding to risks that recovery could turn into stagnation or even recession, the International Monetary Fund has warned. In a worst-case scenario the IMF also fears that a wave of populist politics across the US and Europe could send globalization into reverse with protectionist policies hitting international trade, investment and migration, sending the world plunging into a prolonged period of stagnation.
The warning came after the IMF cut its growth forecasts for a series of countries around the world, leaving Britain the fastest growing economy in the G7. It is urging governments to help troubled banks in the worst-affected parts of Europe, spend more money on boosting economic growth where possible, and reform economies to increase GDP – as well as pushing to keep borders as open as possible. “At 225pc of world GDP, the global debt …is currently at an all-time high. Two-thirds, amounting to about $100 trillion, consists of liabilities of the private sector which can carry great risks when they reach excessive levels,” the IMF said in its fiscal monitor
“The sheer size of debt could set the stage for an unprecedented private deleveraging process that could thwart the fragile economic recovery.” This debt burden is mounting at a time when slow growth means inflation and interest rates will remain low, making it hard for companies, individuals and governments to earn their way out of debt. A combination of low growth, high debt and weak banks could push the world in a dangerous financial and political direction, the IMF said. “The political climate is unsettled in many countries. A lack of income growth and a rise in inequality have opened the door for populist, inward-looking policies,” the IMF warned in its global financial stability report.
“These developments make it even harder to tackle legacy problems, further expose economies and markets to shocks, and raise the risk of a gradual slide into economic and financial stagnation. In such a state, financial institutions struggle to sustain healthy balance sheets, which weakens economic growth and financial stability.” The IMF does not name politicians directly, but the campaigns of Donald Trump and Hillary Clinton have seen a marked turn against globalization in the US, while EU leaders have struggled to agree a trade deal with either the US or Canada.
In a hypothetical scenario imagining a wave of protectionism, the IMF said “These initiatives limit or reverse international trade and financial integration, generating a sell-off in stock markets on profitability concerns and reduced risk appetite, with the real equity price falling by 20pc in the eurozone, the UK and the US over two years,” illustrating the scale of the danger. Banks would be crushed by the economic slump while private consumption and business investment would also fall, hitting growth further. “Protectionist measures in Europe and the US [would] ultimately generate secular stagnation, given constrained macroeconomic policy responses,” the IMF said. Meanwhile it called for action to help troubled banks deal with their problems, reducing bad debts in the short-term, and kick-starting the supply of credit to boost longer-term growth. –Telegraph