News » Is the world prepared for the next economic downturn?

08.08.16

Eight years on from the global financial crisis, economists are wondering when the next downturn will arrive – and how debt-laden governments and their central banks can possibly fight it.

Are we bracing for a new storm?

It was an economic rescue effort like no other in world history. In the immediate aftermath of the Lehman Brothers collapse in September 2008, the major economies’ national governments and central banks took remarkable and concerted efforts to stop the Great Recession turning into another Great Depression.

Central banks slashed official interest rates to extraordinarily low levels, bought up debt to push rates down (quantitative easing) and even, in some cases, set negative rates – measures that previously were barely thinkable. Governments guaranteed large amounts of private debt and pushed up their spending to encourage economic activity.

Though debate still rages, those actions may well have succeeded in preventing the economic downturn turning into something far worse.

Almost eight years later, however, the recovery is still struggling to find traction; the World Bank recently downgraded its 2016 global growth forecast to just 2.4 per cent. Meanwhile, sluggish growth has strangled the flow of tax revenue, making it harder for many governments to wean themselves off deficits and debt.

In the US, public debt as a proportion of GDP is almost 105 per cent, compared with a figure of 120 per cent at the end of World War II. In the UK and France, debt-to-GDP is touching 100 per cent, and in Japan it has topped 250 per cent.

At the same time, central banks are grappling with the legacy of ultra-low interest rates and ballooning balance sheets. The official interest rates of most developed nations are close to (and in Japan’s case, below) zero, and total assets held (excluding the People’s Bank of China) have reached US$11.8 trillion.

It is little wonder that the International Monetary Fund (IMF) recently warned that if there is another severe global downturn, “the needs could exceed the collective resources available”.

And the risks are not small.

Refer to this link for the whole article:  https://intheblack.com/articles/2016/08/01/is-the-world-prepared-for-the-next-economic-downturn

intheblack magazine, August 2016, Adrian Rollins