A “poisonous combination” of record debt and slowing
growth suggest the global economy could be heading
for another crisis, a hard-hitting report will warn on Monday.
The 16th annual Geneva Report, commissioned by the
International Centre for Monetary and Banking Studies and written by a panel of
senior economists including three former senior central bankers, predicts
interest rates across the world will have to stay low for a “very, very long”
time to enable households, companies and governments to service their debts and
avoid another crash.
One of the Geneva Report’s main contributions is to
document the continued rise of debt at a time when most talk is about how the
global economy is deleveraging, reducing the burden of debts.
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Although the burden of financial sector debt has
fallen, particularly in the US, and household debts have stopped rising as a
share of income in advanced economies, the report documents the continued rapid
rise of public sector debt in rich countries and private debt in emerging
markets, like China.
It warns of a “poisonous combination of high and
rising global debt and slowing nominal GDP [gross domestic product], driven by
both slowing real growth and falling inflation”.
The total burden of world debt, private and public,
has risen from 160 per cent of national income in 2001 to almost 200 per cent
after the crisis struck in 2009 and 215 per cent in 2013.
“Contrary to widely held beliefs, the world has not
yet begun to deliver and the global debt to GDP ratio is still growing, breaking
new highs,” the report said.
Luigi Buttiglione, one of the report’s authors explains
how initially, solid reasoning for faster growth encourages borrowing, which
helps maintain growth even after the underlying story sours.
The report’s authors expect interest rates to stay
lower than market expectations because the rise in debt means that borrowers would
be unable to withstand faster rate rises. To prevent an even more rapid
build-up in debt if borrowing costs are low, the authors further expect
authorities around the world to use more direct measures to curb borrowing.
The report expresses most concern about economies
where debts are high and growth has slowed persistently – such as the Eurozone
periphery in southern Europe and China, where growth rates have fallen from
double digits to 7.5 per cent.
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