The world’s combined debt has hit a staggering $152 trillion, with a T. The International Monetary Fund is now concerned world debt levels are a sign the recovery may soon turn into worldwide economic stagnation.
IMF experts also believe the global debt pile could send the world into a new period of recession. If that happens, we may witness a resurgence of populist politics across the globe.
As a result, protectionist measures could badly hurt globalization and put it on hold. Additionally, populist policies could rein in investment, international trading, and immigration resulting in generalized economic stagnation, an IMF report shows.
The fund released its forecast after it adjusted estimates for economic growth of several countries, concluding the that U.K. is the country with the fastest economic growth in the G7.
According to the recent report, global debt has reached an all-time high. About $100 trillion of that debt represent liabilities of private businesses which could turn into a ticking bomb if they grow excessively.
Economic and Political Instability
The staggering debt burden could deleverage the private sector worldwide thus thwarting the already “fragile” recovery. Experts explained that a historic debt and slow economic growth are not a good mix. This means interest rates could hit record lows, and the banking system will face new challenges.
IMF analysts believe a weak banking system along with sluggish economic growth and a growing debt pile could result in a “dangerous” financial and political climate. In its recent report on financial stability, the group noted these factors would open the door for “populist policies.”
There are many countries with a turbulent political climate which cannot benefit from income inequality and lack of growth prospects. IMF experts forecast new shocks to the world’s markets and economies along with economic and financial stagnation.
The IMF stopped short of naming political figures that contribute to economic instability. But it is enough to take a look at the U.S. presidential elections to see an anti-globalization campaign. For instance, Republican nominee Donald Trump accused China of trade “rape” earlier this year. Additionally, EU politicians find it hard to reach a trade deal with Canada or the U.S.
The Worst Case Scenario
The IMF even envisioned a world in which states embrace a new wave of protectionism. According to its experts, that would restrict or reverse healthy financial integration, investments, and international trade.
In that scenario, stock markets will no longer be profitable so investors will sell off and develop a lower risk appetite. Banks will be badly hit, and consumer spending and business investment will sink to new lows too, in the IMF’s vision.
The IMF urges states to help the crumbling banking systems through either debt reduction or a fresh supply of credit. In the U.S. and UK, private sector’s debt was reduced but public debt has skyrocketed.
In Europe, policy makers kept public debt in check at the expense of banks which now struggle because of bad loans granted to private businesses. The IMF believes countries should now give banks cash to help them write off those loans.
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