Debt bear stalks Goldilocks economy

PARIS: The global economy is enjoying a Goldilocks moment, with growth and inflation neither too hot nor too cold.

But a decade after the collapse of the US subprime mortgage market triggered a global crisis, there are warnings that debt is becoming a big risk, lurking in the next room like the scary bears in the children’s tale.

The outlook for the global economy appears bright for the moment thanks to steady growth in the world’s major economies, in stark contrast to reigning pessimism only a year ago when Britain’s Brexit vote and Donald Trump’s protectionist policies weighed on sentiment.

The US economy is purring along in the longest cycle of expansion in its history and China, the locomotive of global growth in recent decades, is on track to deliver more.

Meanwhile the eurozone is finally expanding at a reasonable pace after years of anaemic performance and emerging nations like Brazil are expected to rebound from recession.

“The crisis which struck our continent ... is behind us and this growth gives us reason to believe it is sustainable,” the EU’s economic affairs commissioner Pierre Moscovici said recently.

The International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD) expect the global economy to grow by 3.7 percent in 2018 and their forecasts are infused with an optimism unseen in over a decade.

But that doesn’t mean that governments should be complacent, they caution.

IMF chief Christine Lagarde has taken to quoting US president John F. Kennedy to impress upon governments that they need to address potential problems now.

“Pleasant as it may be to bask in the warmth of recovery ... the time to repair the roof is when the sun is shining,” Kennedy advised lawmakers as the US economy recovered from recession, she reminded listeners in an October speech.

Risks this time could stem from private firms succumbing to unsustainable debt.

The IMF, OECD and economists have pointed to the rising gearing of companies which, having bulked up on borrowing amid ultra-low interest rate policies meant to fuel economic recovery, now face the prospect of rising interest rates.

“Indebtedness of households and corporations has reached record levels in many countries,” OECD chief Angel Gurria said recently.

So-called “zombie firms” are in the frontline of risk.

Ultra- low interest rates have allowed companies with little or no profits to continue operating by lowering their costs, making them the “walking dead” of the corporate world.

But as interest rates tighten, a move already underway in the United States and likely to happen in the eurozone within a couple of years, the cost of servicing loans could quickly exceed profits, forcing them to restructure or close.

A wave of failures and defaults on bonds could then quickly pull the rug out from under the global economy.

“It’s a serious subject,” said one debt specialist on condition of anonymity. — AFP