Three quarters of increase in global debt is accounted for by China, says the IMF, while estimating the ‘all-time high’ global debt at $164 trillion.
The International Monetary Fund has stuck to its forecasts for an upswing in global growth over the next two years, despite signs the world economy may already be slowing and the threat of disruption caused by a developing trade war.
IMF’s World Economic Outlook nevertheless cautions that global debt levels are at an all-time high of $164 trillion, which is an increase of 40 percent since the 2008 global financial crisis. Three quarters of the increase in global private debt comes from China.
Trade conflicts were another threat, according to IMF’s chief economist, Maurice Obstfeld. He termed as “paradoxical” the flirting with trade wars by major economies at a time of economic “expansion is so reliant on investment and trade.”
Recent import restrictions announced by the United States, announced retaliatory actions by China, and potential retaliation by other countries raise concerns in this regard and threaten to damage global activity and sentiment, the IMF report stated. It however predicts a growth of 3.9 per cent for both 2018 and 2019 while noting that there are longer-term downward pressures on growth, leading to a more “sobering” assessment.
The report also noted that risks to medium-term growth arising from easy financial conditions remain well above historical norms and financial conditions in the United States could tighten faster than expected.
“Advanced economies—facing ageing populations, falling rates of labour force participation and low productivity growth—will likely not regain soon the per capita growth rates they enjoyed before the global financial crisis,” Obstfeld said.
Since the IMF outlook was published, the US Federal Communications Commission decided in a 5–0 vote on Tuesday (17 Apr) to ban federal funds being spent on any telecom company deemed a threat to national security. The measure is aimed at further restricting the already limited access of the Chinese telecom giant Huawei to the US market. The move followed the Commerce Department’s decision this week to impose a seven-year ban on firms dealing with another Chinese telecom company, ZTE.
China stepped up its response to the threatened US tariff measures, covering up to $150 billion worth of exports, by announcing a 178 percent tariff on US sorghum exports that took effect yesterday.
One key factor boosting the IMF’s short-term growth forecasts is the cut in corporate and personal income taxes in the US. The expected uptick in US growth was responsible for one-third of the upgrade increase in IMF predictions over last October’s forecast.
The Trump administration claims that massive tax cuts, which will add hundreds of billions of dollars to the budget deficit, will stimulate the economy by providing an incentive for investment. But this claim is rapidly being blown apart. Most of the money will be spent to finance share buybacks and boost stock values.
The Financial Times reported this week that US companies are “expected to shower investors with a record amount of share buybacks in the current earnings seasons, as corporate investors take advantage of major tax cuts… to increase their repurchases programs.”
According to a JPMorgan analysis, US companies will buy back about $800 billion of their stock this year, up from $525 billion in 2017.
There is also doubt over the IMF’s predictions for a short-term upturn, particularly because Europe slowed down in the first quarter of this year after experiencing the fastest rise for a decade during 2017.
According to a report in the Wall Street Journal: “Industrial production [in the euro zone] fell for the third straight month in February, its longest slide since 2012, and there have also been signs of unexpected weakness in surveys of purchasing managers at manufacturers and service providers, measures of retail sales, and barometers of confidence among households and businesses. The region’s biggest economy, Germany, recorded a surprising drop in industrial production in February compared with January.”
This assessment is reflected in a “tracking index” compiled by the Brookings Institution and the Financial Times. The newspaper reported: “Momentum in the global economy has peaked and risks ranging from higher inflation to trade disputes and debt appear likely to taint prospects for 2018.”
Eswar Prasad of the Brookings Institution said: “The world economy’s growth momentum remains strong but is levelling off as the winds of trade war, geopolitical risks, domestic political fractures and debt-related risks loom, with financial markets already reflecting mounting vulnerabilities.”
There are also fears that so-called emerging market economies will be impacted by rising interest rates in the advanced countries, as concerns grow over rising debt and the threat of capital flight.
Obstfeld addressed this danger in a press conference question-and-answer session. “Debts throughout the world are very high, and lots of debts are denominated in dollars,” he said. “And if dollar costs rise, this could be a strain on countries’ sovereign financial institutions.”
In other words, not only will companies be threatened, but major government bodies as well.