Is the global economy really heading for another 2008 style crisis?

I keep reading predictions of doom, that global debt levels are now so high that a new crisis is brewing, one that will make the 2008 crash seem mild. But are such warnings really justified?

Article updated: 1 June 2018 9:00am Author: Michael Baxter

There is much that is wrong with the world. I am concerned about the dangers of a trade war, that could end badly. I am concerned about the possibility that technology is creating ever greater inequality, is leading to natural monopolies and may yet destroy jobs. But I am not convinced global debt is the big issue some say it is. Sure, it is high, if interest rates were to ever return to five per cent or higher, then there might be big problems. Italy seems to be heading for a one-way trip to disaster, but is it really like 2008? I thought it would be a good idea to do some number crunching.

But first some headlines for you to ponder.

When $57 trillion became $164 trillion

In 2015, McKinsey released a report saying that global debt had increased by $57 trillion between 2007 and 2014.

At about that time, Capital Economics calculated that during a ten-year period before a banking crisis, private sector debt to GDP had increased by an average of 40 per cent. But that there had never been an occasion when private sector debt had increased by more than 30 per cent and we had not seen a banking crisis.

In the ten-years to 2014, private sector debt to GDP had risen by:

  • 70 per cent in China
  • 50 per cent in Turkey
  • 45 per cent in Korea and Brazil
  • Just over 30 per cent in Russia

Current account deficits were also rising. In theory, a large current account deficit should lead to currency weakness. In 2015, Capital Economics projected that the biggest current account deficits by the end of the decade would be the UK, Australia, Colombia, Poland, South Africa, New Zealand and Turkey.

And then, in 2018, the IMF calculated that global debt had reached $164 trillion. It said: “Global debt is at historic highs, reaching the record peak of US$164 trillion in 2016, equivalent to 225 per cent of global GDP. The world is now 12 per cent of GDP deeper in debt than the previous peak in 2009, with China as a driving force.”

So, the combination of all that debt and higher interest rates could be catastrophic, right?

Recently the Harvard economic professor, Carman Reinhart warned that Argentina, Turkey and Peru have the worse combination of current account vulnerability and poor government effectiveness, but she also suggested that Brazil, Indonesia, Mexico, the Philippines and India were not far behind. But then the Reinhart study also suggested that Thailand is strong, yet this country has suffered a real estate bubble that seems to have burst.

Current account

So let’s look at some detail. And I shall begin with current account deficits – the current account is defined as the sum of the balance of trade (goods and services exports minus imports), net income from abroad and net current transfers.

Current Account deficit to GDPR in per cent in 2016, source IMF

Argentina Minus 2.7
Australia Minus 3.01
Canada Minus 2.9
China Plus 1.8
France Minus 0.9
Germany Plus 8.2
Greece Minus 1.0
India Minus 0.5
Indonesia Minus 1.8
Italy Plus 2.7
Mexico Minus 2.2
Peru Minus 2.8
Philippines Minus 0.4
Spain Plus 1.9
Turkey Minus 3.8
UK Minus 5.8
US Minus 2.4

Total Private Debt

Total Private debt, loans and debt securities, to GDPR in per cent, source IMF

Slide to view more
Argentina 20 18
Australia 202 189
Canada 266 218
China 193 103
France 188 157
Germany 105 116
Greece 124 113
India 55 55
Indonesia 41 27
Italy 115 116
Mexico 43 30
Peru 51 30
Philippines 56 35
Spain 166 209
Turkey 85 47
UK 169 196
US 151 168

Note how debt has fallen in the UK and US relative to 2008 but risen in Australian and Canada. Note also how low it is in some emerging markets, this may be an indication of how too little private debt may be holding economies back. Debt has increased enormously in Turkey and China. 

Household debt

Household debt loans and debt securities, to GDPR in per cent, source IMF

Slide to view more
Argentina 6 5
Australia 122 106
Canada 101 82
China 44 18
France 57 49
Germany 54 60
Greece 61 56
India 10 10
Indonesia 17 11
Italy 42 39
Mexico 16 13
Peru 15 9
Spain 69 86
Turkey 18 12
UK 86 94
US 79 95

Public Debt
General government debt to GDPR in per cent, source IMF

Slide to view more
Argentina 53 53
Australia 32 8
Canada 42 35
China 44 27
France 97 69
Germany 68 65
Greece 183 109
India 69 74
Indonesia 28 30 (87 in 2000)
Italy 132 102
Mexico (central gov debt) 37 24
Peru 23 27
Philippines 39 53
Spain 99 39

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

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Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.