World debt hits record $164 trillion: Should we be worried?
The global economy has been in its strongest upswing since 2011, but there's a monster under the bed. In 2016, the world's debt reached a record $164 trillion, which amounts to approximately 225% of the world's GDP, according to IMF figures from its semi-annual fiscal monitor report. Interestingly, China accounted for almost three-quarters of the global increase in private debt since the 2008 financial crisis.
The IMF forecast an expansion of 3.9% in 2018 and 2019 for the world economy, saying that in subsequent years, the global economy could be impacted by tighter monetary policy, and the fading effects of US fiscal stimuli. Notably, the last time world debt figures had peaked to such an extent was in 2009.
"$164 trillion is a huge number. When we talk about the risks looming on the horizon, one of the risks has to do with the high level of public and private debt," said Vitor Gaspar, head of the IMF's fiscal affairs department.
The effects of the 2008 financial crisis' debt hangover can be seen in the IMF figures even a decade after the world economy went into recession. Governments had to increase spending to boost economic growth, thus adding to public debt. Meanwhile, central banks resorted to unconventional means to ease financing in economies, such as buying bonds.
According to 2017 data, one-fifth of emerging economies and middle-income countries had debt-to-GDP levels above 70%, led by Brazil at 84%, and India at 70.2%. Interestingly, despite China's massive contribution to the rise of private debt, its gross government debt stood at 47.8%.
Large debts could impede the ability of national economies to increase spending if their economies fall into recession. Additionally, large debts could cause a drag on economic growth. Notably, the IMF said that high levels of sovereign debt could make it difficult for governments to refinance when their debt reaches maturity, especially if financing conditions tightened in the future.
More than one-third of first world economies had debt-to-GDP ratios above 85%, three times more than what they had in 2000. Japan had the highest debt-to-GDP ratio last year, at 236%, followed by Italy (132%), and the US (108%).
The IMF has asked governments to take decisive actions and rebuild their fiscal buffers so they can increase spending, should hard times come. Additionally, the fund urged the US to "recalibrate" its fiscal policy to its debt-to-GDP levels decline over the medium term. The US' budget deficit is set to surpass $1 trillion by 2020.