According to the latest report from the International Monetary Fund, the global economy is expanding at its fastest rate since 2011. But there is a growing risk which is not getting adequate attention. "The latest Fiscal Monitor of the IMF, released last week, noted that global debt at the end of 2016 was 225% of the Gross Domestic Product (GDP), which is 12 percentage points higher than the previous peak of 2009, when governments were on a deficit spending spree to prevent economic collapse," wrote an editorial in the Mint. The global debt had risen to $164 trillion in 2016. The rise of private sector debt, especially in China is a worry. Japan's debt to GDP ratio last year was at 236%, Italy was at 132% while the US was at 108%. US budget deficit is projected to surpass $1 trillion by 2020. Of emerging markets, Brazil's debt to GDP ratio stood at 84% while India was at 70.2%. Total GDP of the entire world was around $75.4 trillion in 2016. The US Federal Reserve is committed to increasing interest rate at least twice more this year but, if the economy grows faster pushing inflation above 2% it may be forced to tighten monetary policy faster. That would increase the cost of servicing this huge debt that has piled up. Already, "yields on two-year US government bonds have risen to their highest level since the financial crisis". Secondly, the fast growth in the US economy may not last and a slowdown in the global economy "will make debt servicing more difficult". Third, "General government debt in emerging markets and middle income-economies is expected to go up from 37.4% of GDP in 2012 to 52.9% of GDP in 2019". With rising interest costs governments will have less money to spend on infrastructure. And finally, in the event of a recession, governments will not be able to borrow to stimulate their economies when they are already loaded with debt. A study of 24 advanced economies in the post-war period by CD Romer and DH Romer showed that output declined by only 1% in a recession if the government could resort to fiscal and monetary stimulus, but "the output declines by about 10% when it doesn't have the policy space to respond". Central banks are worried that a trade war will lower growth rate while higher tariffs may be inflationary. Facing stagflation central banks may not be able to use a "monetary policy put" to ease the situation. "India may become a surprise victim of trade war," said Rabobank, giving different scenarios which could be very damaging for our economy. When you are weak you become roadkill.
No comments:
Post a Comment