Central bankers warn of recession risk from ‘debt trap’ to global economy
The global economy risks falling into a “debt trap” in developed markets and particularly in China, according to a warning issued today by an influential central banking body.
The Bank for International Settlements (BIS) said nations must tread a “narrow path” to avert disaster in the next slowdown, in its annual report on the state of the world economy.
The imbalances in China are particularly notable, the BIS report found, although it added that authorities in the world’s second-largest economy are taking steps to “rein in some of the more serious financial excesses.”
The People’s Bank of China, the country’s central bank, today announced separately a cut to the required reserve ratio for banks, in what economists interpreted as a bid to encourage banks to swap debt for equity as it tries to encourage lower debts.
The debt pile could be dangerous because rising interest rates will increase the costs of servicing debt, potentially “threatening the expansion”, the BIS said. Total global debt had risen to more than 300 per cent of global GDP by the end of 2017, according to BIS figures, significantly higher than before the financial crisis.
Agustin Carstens, the general manager of the BIS, said that the easy monetary policy since the financial crisis “has left a legacy of swollen private and public sector balance sheets and higher debts – a legacy that shapes the road ahead.”
Central banks slashed interest rates and resorted to unorthodox measures such as bond buying in response to the global financial crisis a decade ago, in a desperate effort to stimulate investment.
However, while growth recovered, the BIS warned that time is running out on addressing the vulnerabilities that have developed in the years of relatively strong global growth.
The turning business cycle has “seeds of risk, including recessions”, Carstens said. “There are signs of financial cycle-related imbalances in countries little affected by the crisis, following years of private credit growth.”
The BIS warning comes amid a period of strong growth in the global economy, with other international bodies such as the International Monetary Fund and the Organisation for Economic Cooperation and Development predicting further years of global economic growth.
However, the length of the current expansion and building “complacency” in financial markets could make any “subsequent adjustment more painful”, the BIS added.
Meanwhile, both central banks and governments are constrained in how they can respond to new crises, with interest rates still at or near historic lows and public sector debt loads uncomfortably high for some states to borrow significantly more.