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

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

Total Private Debt

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

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

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

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