The report continues: “At the same time, in a poisonous combination, world growth and inflation are also lower than previously expected, also – though not only – as a legacy of the past crisis. 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.”
On the bright – well, less gloomy – side, the financial sector does appear to be putting its house in order, with a reduction in debt there allowing total developed market debt as a percentage of GDP at least to stabilise at a level close to its all-time high of 385%. Excluding financials, however, as the graph below shows, global debt continues to grow not only in emerging as well as developed markets.
Source: 16th Geneva Report on World Economy September 2104
Thus, says the report, while up to 2008 global debt accumulation was led by the developed world, it has since continued “under the impulse provided by a sharp rise in the debt levels of emerging economies”. These countries are, it adds, “a main source of concern in terms of future debt trajectories, especially China and the so-called ‘fragile eight’, which could host the next leg of the global leverage crisis”.
For the record, the ‘fragile eight’ are Argentina, Brazil, Chile, India, Indonesia, Russia, South Africa and Turkey and so include some countries that were expected to be future powerhouses of the global economy. Indeed, overall, the report comes as something of a cold shower to the rosy narrative shaped by policymakers and politicians that the global economy is successfully reducing its debt levels.
Here on The Value Perspective we have consistently warned about a build-up of risk in the system as well as of the dangers of taking on too much debt – not least because it does not leave any room for manoeuvre should things turn against you. The negative consequence of overleverage can be messy enough at a corporate level but the issues flagged in the Geneva Report raises the stakes considerably.