The Debt/Growth conundrum

As Friday’s “second flash crash” of the Pound Sterling (well, it was once considered “sterling”) demonstrates, we live in uncertain and volatile times. No matter what the actual cause of the event, it seems symptomatic of a greater malaise and sense of uncertainty afflicting the global economy, as existential gloom continues to outweigh animal spirits.

Ahead of its Annual Meetings, the IMF recently published its latest World Economic Outlook (WEO:, which reflects rising concern that globally the rate of growth in output is slowing, to 3.1% in 2016, with only a slight uptick to 3.4% forecast for 2017. Now, that rate of growth would be considered more than satisfactory in the US, the EU, Japan and the UK, but it reflects still subdued growth expectations in emerging and developing markets. Then couple that with the contents of its latest Fiscal Monitor (
and one has reason to be concerned.

On the general economic side, there are the obvious concerns about slowdown in the PRC, the Brexit shock, a reverse in globalization and increasing anti-trade sentiments, as well as constrained demand, none of which is exactly news by now. However, it is Fiscal Monitor that should also be causing policy-makers sleepless nights, because it points out that, contrary to many people’s likely perception, the level of debt in the non-financial sector (general government, households, non-financial firms) is continuing to rise, and now stands at an all-time recorded high of 225% of global GDP.

More particularly, some two thirds, USD 100TN equivalent, is private sector debt, with its levels continuing to rise in many advanced as well as in key emerging market economies. Ironically, of course, ultra-low interest rates encourage the use of debt, but the continuing constraints on demand may well be reducing the rate of growth- in other words, it could be worse.

This level of debt matters for a number of reasons. Empirically, financial crises tend to be associated with excessive private debt, while high levels of public debt, coupled with fiscal weakness, tend to exacerbate the outcomes. If a government’s fiscal and budgetary position are already weak, it has fewer means at its disposal to manage the consequences of a financial crisis, because it cannot act counter-cyclically.

Ultimately, it is arguable that debt levels are still constraining growth, yet higher rates of growth are required if debt levels are to be reduced to more sustainable levels. ‘Tis indeed a puzzlement!

In reality, what the IMF is starting to emphasize is that debt which cannot be repaid, will not be repaid. The Japanese economy has suffered from the “zombiefication” of large sectors on its industry base, and there are signs of the same issue in other economies, such as that of Italy. This is not exactly a new concept. After all, the biblical Judaic concept of a periodic “Jubilee” year includes debt forgiveness as part of the required actions.

At Awbury, we study and try to understand these seemingly arcane and abstract issues because they actually matter in the real world. If a banking system has a burden of unproductive, non-performing loans that are not going to be serviced in full, or require time to be restructured, there are ways in which Awbury can provide mechanisms and techniques that help clients address the problem, and thus free up capital and resources for more productive and economically beneficial deployment.

The Awbury Team


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