Developed economies are at risk of becoming trapped in a low-growth, low-inflation cycle in which mounting public, household and company debt will be hard to pay down without triggering prolonged recession, according to an ominous report.
In their 16th Geneva Report, the Geneva-based International Centre for Monetary and Banking Studies (ICMB) and London's Centre for Economic Policy Research (CEPR) say years of fiscal stimulus by governments and money printing by central banks have driven global debt-to-gross domestic product ratios to dangerous levels.
This blow-out runs counter to the idea that the developed economies hardest hit during the global financial crisis have been busy deleveraging over the past five or six years.
"Contrary to widely held beliefs, the world has not yet begun to de-lever," the report said.
"Global debt-to-GDP is still growing, breaking new highs."
According to the authors' calculations, world total government, household and corporate – excluding bank – debt has grown from about 160 per cent of GDP in 2001 to nearly 215 per cent at the end of last year.
The developed world has been responsible for much of that growth. However, a recent surge in debt-to-GDP ratios in the emerging world, particularly China, has caught the authors' attention.
"Emerging markets did better during the [global financial] crisis, but have recently slowed down," they said.
"Some, such as China, are seeing marked increases in leverage that raise the odds that they will experience home-grown crises in the future."
The report also identifies the so-called "fragile eight" emerging markets – Brazil, Chile, Argentina, Turkey, India, Indonesia, Russia and South Africa – as an "important source of concern in terms of future debt trajectories".
"China and the so-called 'fragile eight' could find themselves in the unwanted role of 'host' to the next phase of the global leverage crisis," it said.
This accumulation of household, corporate and government debt in both the emerging and developed world was made all the more troubling by stubbornly low or slowing growth rates, the report says.
Although extreme monetary easing in key global economies such as Britain and the US seemed to be working, the European Union was struggling to generate growth and inflation, while output expansion in many emerging economies was also slowing.
This would make servicing debt without sharp cuts in government spending increasingly difficult, the report says. Low inflation and even deflation, would make debt repayments more costly.
"Deleveraging and slower nominal growth are in many cases interacting in a vicious loop, with the latter making the deleveraging process harder and the former exacerbating the economic slowdown," it says.
"Moreover, the global capacity to take on debt has been reduced through the combination of slower expansion in real output and lower inflation."
The report notes that both the US and Britain had managed to revive economic growth while both business and households paid down debt.
The cost, however, had been massive expansion of central bank and government balance sheets, in what it describes as "a substantial re-leveraging of the public sector".
"As a consequence, deleveraging the central banks will be a primary policy challenge for the foreseeable future," it says.
