Time run­ning out to fix the roof while sun still shines

As fore­casts for the global econ­omy de­te­ri­o­rate, the UK, US and Europe have failed to con­trol their debts

The Daily Telegraph - Business - - Business - By Tim Wal­lace

THE global econ­omy’s growth spurt is over ac­cord­ing to economists and an­a­lysts who are slash­ing their fore­casts.

Amer­ica’s trade war to­gether with ris­ing gov­ern­ment debts and the im­pend­ing end of the long, slow re­cov­ery from the fi­nan­cial cri­sis are com­bin­ing to cre­ate a gloomier eco­nomic out­look. Yet gov­ern­ments have not used the good years to bring deficits and debts un­der con­trol, un­der­min­ing their abil­ity to fight fu­ture re­ces­sions, rais­ing the risk of debt crises and stor­ing up prob­lems as age­ing pop­u­la­tions in­crease fi­nan­cial de­mands on the state.

Credit rat­ings agency Moody’s pre­dicts global GDP growth will slow from 3.3pc in 2017 and 2018 to be­low 3pc over the next two years. It blamed ris­ing in­ter­est rates and “el­e­vated trade ten­sions” for the slow­down. Its an­a­lysts ex­pect the big­gest economies to slow more with growth in the G20 to slide from 2.3pc this year to 1.9pc in

2019 and 1.4pc in 2020.

The In­ter­na­tional Mon­e­tary Fund cut its Euro­pean growth fore­casts, pre­dict­ing a slow­down from 2.8pc growth in 2017 to 2.3pc this year and 1.9pc next.

“In the short term, es­ca­lat­ing trade ten­sions and a sharp tight­en­ing in global fi­nan­cial con­di­tions could un­der­mine in­vest­ment and weigh on growth,” said the IMF in its re­gional eco­nomic out­look for Europe. “In the medium term, risks stem from de­layed fis­cal ad­just­ment and struc­tural re­forms, de­mo­graphic chal­lenges, ris­ing in­equal­ity and de­clin­ing trust in main­stream poli­cies.” Growth ap­pears to be past its peak yet economists are wor­ried that gov­ern­ments are spend­ing and bor­row­ing at dan­ger­ous lev­els, hav­ing failed to cut deficits and debts de­spite good con­di­tions in re­cent years. As a re­sult they risk be­ing left ex­posed in a fu­ture down­turn or cri­sis.

IMF direc­tor Poul Thom­sen urged gov­ern­ments to take ac­tion quickly. He said: “These are still good eco­nomic times, de­spite un­cer­tainty. These are the times pol­i­cy­mak­ers should be sure that their economies are in a stage where they can be pre­pared for any risks that might be down the road.

“This is a time to re­duce deficits and debt lev­els. You don’t want to be in a sit­u­a­tion where, as things start go­ing down, you have to tighten be­cause you are con­cerned about the deficit.”

The US has em­barked on a ma­jor pro­gramme of tax cuts and gov­ern­ment spend­ing, ramp­ing up an­nual bor­row­ing to around $1.3 tril­lion (£1 tril­lion), an un­usual move at a time of strong growth. The UK Gov­ern­ment has cho­sen to spend ex­tra tax rev­enues in­stead of stick­ing to a plan to bal­ance the books by the mid­dle of the 2020s. It spends around £40bn a year on debt in­ter­est.

Italy is in a row with the Euro­pean Com­mis­sion over Rome’s plans to in­crease its bor­row­ing. Mar­kets an­tic­i­pate more bor­row­ing from Europe as a whole as An­gela Merkel’s rule in Ger­many comes to an end, re­mov­ing a key fig­ure in favour of fis­cal re­straint. Economists at JP Morgan As­set Man­age­ment fear gov­ern­ments have missed their chance to cut debts, and in the com­ing decades will face greater de­mands on fi­nances.

“Mon­e­tary, growth and cycli­cal con­di­tions have been gen­er­ally favourable for debt con­sol­i­da­tion, but both have been over­whelmed by sus­tained shifts in fis­cal pol­icy,” said the an­a­lysts.

This sug­gests gov­ern­ments are on track for a tough fu­ture as de­mands for ex­tra spend­ing grow. “The most acute chal­lenge is the de­mo­graphic shift set to take place in the com­ing decades,” said JP Morgan. “While the sever­ity of the prob­lem dif­fers by coun­try, all coun­tries in the de­vel­oped world are see­ing a slow­ing rate of growth of their work­ing-age pop­u­la­tions and a rapid ex­pan­sion of those of pen­sion­able age.”

Once a gov­ern­ment has a large debt bur­den it can be­come hard to stim­u­late a stalling econ­omy.

“Debt is a drag in re­ces­sions,” said Thushka Ma­haraj at JP Morgan As­set Man­age­ment. “Once you en­ter a down­turn the abil­ity to come out of it in a quick and ef­fi­cient way is im­paired by higher debts.”

There is less room for gov­ern­ments to bor­row and spend, cen­tral banks find it harder to stim­u­late bor­row­ing when debts are high, and the fo­cus may be on pay­ing down debts in­stead.

In Italy’s case a fail­ure to cut the na­tional debt could even lead to a new cri­sis. “Italy’s weaker fis­cal po­si­tion (as the debt ra­tio is more likely to re­main con­stant than fall) leaves the coun­try vul­ner­a­ble to shocks that could de­rail debt sus­tain­abil­ity and worsen fi­nan­cial con­di­tions,” said UBS in its global eco­nomic out­look.

It sees this as a key risk to the eco­nomic out­look, warn­ing of the dan­ger of “Euro­pean pe­riph­eral debt stress in­ten­si­fy­ing” due to Italy, which could see debt surging even in rel­a­tively be­nign eco­nomic con­di­tions.

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