Global debt climbed to a record high in 2016, the International Monetary Fund reported, urging countries to act fast to build “fiscal buffers” ahead of the next economic downturn.
In its half-yearly fiscal monitor report, the IMF said total debt reached $164 trillion in 2016, or 225% of global gross domestic product. Compared with the previous peak in 2009, the world is now 12% of GDP deeper in debt, the fund said.
Debt in advanced economies is at 105% of GDP on average — levels not seen since World War II — while in emerging market and middle-income economies, it is close to 50% of GDP on average — levels last seen during the 1980s debt crisis.
China, Japan and the U.S. account for more than half of global debt, and China alone accounts for almost three-quarters of the increase in private debt since the financial crisis.
“High government debt and deficits are cause for concern,” the IMF noted. “Countries with elevated government debt are vulnerable to a sudden tightening of global financing conditions, which could disrupt market access and put economic activity in jeopardy.”
To protect themselves against future headwinds, the fund said countries “need to build fiscal buffers now by reducing government deficits and putting debt on a steady downward path. This will create room for fiscal support in case of a downturn and prevent fiscal vulnerabilities from becoming a source of stress on the economy if financing conditions tighten suddenly.”
The rise in global debt has been fueled by low interest rates. “An increase in borrowing and credit to revive the world economy following the financial crisis is exactly what the International Monetary Fund and global financial authorities wanted,” a Reuters commentary said.
“Higher borrowing reflects a welcome increase in confidence among individuals and companies,” it added.
The IMF also rejected President Trump’s argument that the extra growth generated by the U.S. fiscal stimulus will pay for itself.
“We urge policymakers to avoid pro-cyclical policy actions that provide unnecessary stimulus when economic activity is already pacing up,” Vítor Gaspar, the IMF’s director of fiscal affairs, said.