The lessons of the 2008 banking crisis seemed obvious. Economic growth built on the shaky foundations of unsustainable debt was nothing more than a house of cards ready to come crashing down.The lessons of the 2008 banking crisis seemed obvious. Economic growth built on the shaky foundations of unsustainable debt was nothing more than a house of cards ready to come crashing down.
A decade on, it’s hard to make a case that much has changed. On the face of things, there is a renewed mood of optimism that we might be on the verge of good times again. The IMF’s latest World Economic Outlook upwardly revised its prediction for global economic growth to 3.9 per cent for 2018 and 2019, up 0.2 per cent from its forecast just six months ago.
Yet a widely shared and republished op-ed piece in the Washington Times points out that the IMF report is not all good news. Dig through the detail, and you see that economic output is not the only thing on the rise. So is global debt - up 41 per cent since 2007, now standing at $164 trillion.
To get a perspective on that figure, the same article cites the size of the world economy in terms of output at $130 trillion. In other words, the world borrows more than it produces. Although beyond the scope of this blog, there is surely a debate to be had over whether we should be talking about ‘growth’ at all when the global economy is effectively in the red.
Looking more closely at the figures, it is interesting to note that in those countries labeled as ‘advanced economies’, such as the USA, Japan and Europe, the rate of growth in debt has slowed down considerably. Collectively, debt in these countries almost doubled between 2001 and 2007, but has grown by just 19 per cent since.
These were the countries where the banking crisis originated and where, certainly in parts of Europe, it hit hardest. Perhaps some lessons have been learned, after all - although the US, a major driver of the crisis with its sub-prime mortgage debacle, has still seen debt grow by around the global average.
Taking up the batten in the vanguard of global debt growth are the so-called emerging economies, led by the giant booming markets of China and India. Overall, these countries have seen debt increase by 250 per cent in the past decade, with China alone taking on a staggering five times more debt.
With more and more companies in the UK and across the world looking to China and India for the enormous opportunities they offer, these figures shouldn’t be taken lightly. Debt is all well and good until someone cannot pay, and that is where the house of cards can quickly come crashing down.
A country like China might represent huge potential for exporters and importers. But if the country’s economy is operating on ever more stretched lines of credit, the risks of payment defaults are only going to increase.
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