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 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.