Last week, the International Monetary Fund released a news report saying that governments should continue to use the current strong economic growth to strengthen their finances.
Despite these increases, the banking sector has been resilient since the global financial crisis. According to The Guardian, the IMF warns that all economics look vulnerable as a prolonged period of low interest rates leads to a build-up of debt worth 225 percent of GDP in 2016.
The global economy is expected to grow almost four percent in both 2018 and 2019, yet the IMF states that countries that make the effort to reduce budget deficits will now be in the best place when tougher times arrive.
Building buffers like this will help protect the economy by reducing the risk of financing difficulties and creating room for new fiscal policy that will support economic activity during a downturn.
The IMF warned governments that decisive action is needed now. By improving their finances when economic performance is strong, governments will have more scope to use tax cuts to or public spending to combat a future downturn.
Taking action now before future downturn will allow governments with weakened economies to borrow money in an easier way.
Interestingly, the IMF made a criticism of the U.S., mentioning that President Donald Trump’s administration is embarking on tax cuts when the IMF predicts the economy is close to full employment.
The suggestion that the IMF provides to the U.S. is that they should be “recalibrated to ensure the government debt-to-GDP ratio declines over the medium term;” essentially, the IMF is saying that the U.S. should be moving in the opposite direction to what it is currently aiming for.
The fund is urging policymakers to avoid pro-cyclical policy actions that provide unnecessary stimulus when economic activity is rising.
Another country that the IMF has posed warnings about is China, which was primarily responsible for much of the increases.
China alone has been responsible for more than 40 percent of the increase in global debt since 2007, reported The Guardian, while adding that debt levels across emerging markets now average 50 percent of GPD, the highest level since the 1980s. As a result of tighter regulations, their banks have reduced their use of risky short-term borrowing.
There have been concerns with low-income countries, primarily in Africa, because debt service has been rising rapidly in countries with high inflation rates and debt distress.
The World Bank offers these low-income countries interest-free or cheap loans, with a majority of the increase in interest-rate burdens reflected in the growing tendency to borrow from private capital markets.
With these IMF report now public, it will be interesting to see how various countries, particularly the U.S. and China, adhere to the concerns and criticisms, and whether or not they will fall into a massive pile of global debt or rise above it successfully.