The biggest threats to global economic growth are government debt and protectionist leanings, European Union economy commissioner Pierre Moscovici said, underlining the challenges confronting finance chiefs at the International Monetary Fund meetings in Washington.
“The two main risks for growth, which is now very solid all over the world, are on the one hand protectionism and trade tensions, and on the other hand debt,” Moscovici said Friday in a Bloomberg Television interview in the US capital. “There is no trade war for the time being, so that’s good.”
The International Monetary Fund warned this week that the world’s debt load has ballooned to a record $164 trillion, a trend that could make it harder for countries to respond to the next recession.
The Washington-based fund also warned this month that the global commercial order risked being “torn apart” by trade wars. US President Donald Trump is pushing for a crackdown on what he considers unfair trade practices by China and has announced tariffs on imports of steel and aluminum.
The EU is seeking a permanent exemption from the metals levies after Trump granted a waiver to the bloc until May 1 and left open the possibility of a longer exclusion. The European Commission, the EU’s executive branch in Brussels, has said that failure to gain a longer exemption from the US metal-import duties would lead to a tit-for-tat response by the bloc.
The global debt burden clouded the IMF’s otherwise upbeat outlook of the world economy, which is in its strongest upswing since 2011. The fund forecasts expansion of 3.9% in 2018 and 2019.
“For the medium term, as always when you have a high debt and a high deficit, you need to watch that to avoid imbalances,” Moscovici, the EU’s economic and financial affairs commissioner, said in the interview with Tom Keene and Francine Lacqua. “And this is not only for Europe; this is worldwide.”
With the deficit in the US, the largest economy, “there are short-term effects macro-economically; long-term effects, that we cannot really foresee; and there are political effects,” Moscovici said. “For the short-term effects—they are positive, since the American growth is picking up and with a booming American economy it’s good for the rest of the world.”
IMF Sounds Alarm
In its latest Fiscal Monitor, the fund estimates that global debt now stands at $164 trillion, equivalent to 225% of GDP, up from a previous peak of 213% in 2009.
“Countries with elevated government debt are vulnerable to a sudden tightening of global financing conditions, which could disrupt market access and jeopardize economic activity,” it said.
The warning makes for a change of tone from the fund’s report a year ago. At that stage, the fund downplayed its usual concerns about debt and urged “a greater role for fiscal policy” from governments around the world in stimulating demand.
However, a year ago global economic GDP growth looked weak. It has picked up markedly over the past 12 months. Growth in 2017 was 3.8%, the fastest since 2011.
The report notes that the US, where Trump has pushed through large unfunded tax cut, is expected to see significant increases in government borrowing in the coming years and urges that “fiscal policy should be recalibrated to ensure that the government debt-to-GDP ratio declines over the medium term”.
However, the fund’s latest analysis also makes it clear that the bulk of the increase in global leverage over the past decade has been due to China, which has maintained its domestic GDP growth through an explosion of commercial bank lending. In 2007 China accounted for 4% of global debt. By 2016 this share had shot up to 15%.
The country is responsible for a full three quarters of the increase in global private debt since the financial crisis.
Britain's gross government debt is forecast by the IMF to fall from a peak of 88.2% of GDP in 2016 to 82.5% by 2023. By contrast in the US it projected to rise from 107.2% to 116.9% over that period.
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