IMF sounds alarm over $164 trillion global debt pile

In its latest Fiscal Monitor, the Fund estimates that global debt now stands at 225 per cent of GDP, up from its previous peak of 213 per cent in 2009

In 2007 China accounted for 4 per cent of global debt but by 2016 this share had shot up to 15 per cent (AFP/Getty Images)

The International Monetary Fund has returned to its warnings about global debt, highlighting in its latest report that leverage across the planet is now higher than it was before the global financial crisis.

In its latest Fiscal Monitor, the Fund estimates that global debt now stands at $164 trillion, equivalent to 225 per cent of GDP, up from a previous peak of 213 per cent in 2009.

“Countries with elevated government debt are vulnerable to a sudden tightening of global financing conditions, which could disrupt market access and jeopardize economic activity,” it said.

The warning makes for a change of tone from the Fund’s report a year ago. At that stage, the Fund downplayed its usual concerns about debt and urged “a greater role for fiscal policy” from governments around the world in stimulating demand.

However, a year ago global economic GDP growth looked weak. It has picked up markedly over the past 12 months. Growth in 2017 was 3.8 per cent, the fastest since 2011.

And the IMF now expects growth to strengthen this year and next to 3.9 per cent.

“As growth gains momentum, fiscal stimulus to support demand is no longer the priority,” it said.

The report notes that the US, where Donald Trump has pushed through large unfunded tax cut, is expected to see significant increases in government borrowing in the coming years and urges that “fiscal policy should be recalibrated to ensure that the government debt-to-GDP ratio declines over the medium term”.

However, the Fund’s latest analysis also makes it clear that the bulk of the increase in global leverage over the past decade has been due to China, which has maintained its domestic GDP growth through an explosion of commercial bank lending.

In 2007 China accounted for 4 per cent of global debt. By 2016 this share had shot up to 15 per cent.

Fragile China

IMF Fiscal Monitor

The country is responsible for a full three quarters of the increase in global private debt since the financial crisis.

China has been trying to wean its economy off a dependency on credit expansion and infrastructure investment to drive its GDP growth in recent years through a crackdown on the country’s vast shadow banking sector.

Recent data has pointed to some progress, although the level of private sector indebtedness remains vast and many analysts believe large tranches of commercial loans made over recent years are unlikely to be repayable.

UK gross government debt is forecast by the IMF to fall from a peak of 88.2 per cent of GDP in 2016 to 82.5 per cent by 2023. By contrast in the US it projected to rise from 107.2 per cent to 116.9 per cent over that period.