Debt Levels Surge to a Record 225% of Global GDP

IMF warns about the doubling of the world’s $152 trillion debts since 2000

The International Monetary Fund (IMF), in its semi-annual Fiscal Monitor, has stated that gross debt in the non-financial sector has more than doubled over the past 15 years to $152 trillion in 2015, as reported by Bloomberg on October 5th, 2016. The figure, which includes debt held by governments, non-financial firms, and households, has surged to a record 225% of global GDP, according to IMF. About two-thirds of the debts are accounted by the private sector, while the remaining is public debt, which has increased from below 70% to 85% of global GDP in 2015.

Source: IMF, OECD, Bloomberg
Source: IMF, OECD, Bloomberg

The IMF has pointed out that a slowdown in global growth is making it difficult for major economies to pay off debt obligations, resulting in a vicious loop in which low growth hampers deleveraging and the debt overhang worsens the slowdown. Moreover, the massive debt load complicates the task for global policy makers, who have been urged to use fiscal policy to boost growth after central banks have failed in most cases to stimulate economies.

Since most of the debts date back to the boom in private debt that preceded the 2008 financial crisis, the deleveraging of these debts has been uneven and in some instances, resulted in the rising of debts. Most of the bad debts have ended up in the government sector. Meanwhile, low interest rates have resulted in a surge of corporate debts in emerging markets. Levels of private debt are now high in both advanced nations and a few large emerging markets such as China and Brazil, which are considered systemically important to the global financial system.

High debt linked to lower growth

Recent research has shown that high debt is linked with lower growth, even when a crisis is avoided. If companies postpone paying off debts, they could become “very sensitive to shocks, increasing the risk of an abrupt deleveraging process,” according to the IMF. Depressed economies with weak banking systems should avoid premature tightening of fiscal policy, while governments could speed up restructuring of private debt through measures such as subsidizing creditors to lengthen maturities.

IMF to take action to spur global growth at annual meet

Finance chiefs and central bankers from the IMF’s 189 member nations are attending the two-day annual meeting at Washington during October 7th-9th, 2016. Policy makers have been urged to resist making protectionist barriers to trade and instead take measures to boost global growth. On account of the stagnant wages and diminishing job security, measures such as less integration and more trade barriers are seen to pose risks for elevated financial markets that remain susceptible to sudden swings in investor sentiment, as seen in jitters caused by Deutsche Bank AG’s financial health.

The IMF, in its latest World Economic Outlook released on Tuesday, October 4th, 2016, has forecasted that global growth would slow down to 3.1% in 2016, after growing 3.2% in 2015. The global economic growth is expected to rebound to about 3.4% in 2017, according to IMF, which has stuck to its July 2016 projections. However, IMF cut forecasts for US growth to 1.6% in 2016 and 2.2% in 2017.

Source: IMF, Bloomberg
Source: IMF, Bloomberg

WTO trims 2016 world trade growth forecast to 1.7%

Resonating closely with the IMF’s move to trim global growth projections for 2016, the World Trade Organization (WTO) has revised downwards its forecast for global trade growth in 2016 to 1.7% from the earlier level of 2.8% in April 2016, on September 27th, 2016. The downward revision is mainly on account of a slowdown in China and falling levels of U.S. imports, marking the first time in 15 years that global trade is expected to lag behind global GDP growth. With expected global GDP growth of 2.2% in 2016, this year would mark the slowest pace of trade and output growth since the financial crisis of 2008.

Source: WTO, Bloomberg
Source: WTO, Bloomberg

The downgrade follows a sharper-than-expected decline in merchandise trade volumes in Q1 FY16 (-1.1% Q-o-Q, as measured by the average of seasonally-adjusted exports and imports) and a smaller-than-anticipated rebound in Q2 FY16 (+0.3%). The decline was driven by slowing GDP and trade growth in China, Brazil, and North America, which reported the strongest import growth in 2014-15, but has decelerated since then.

The WTO said that while trade is expected to pick up in H2 FY16, the pace of expansion is likely to remain subdued due to financial volatility stemming from changes in monetary policy in developed countries and the Brexit issue.

Most notably, the outlook for H2 FY16 and FY17 are dependent on the changes in dollar value and certain commodities such as oil. For 2017, the WTO has also revised downwards its forecast for world trade growth to 1.8% to 3.1%, from 3.6% estimated in April 2016.

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