The Bank for International Settlements (BIS) in Geneva believes too much of the world's economic growth is driven by debt.
While the global economy is recovering from the financial crisis of 2007, the non-financial sector debt to GDP ratio in G20 countries has increased by more than one fifth, noted BIS general manager Jaime Caruana at the bank’s Annual General Meeting on June 29.
“As debt increases, the ability of borrowers to repay becomes progressively more sensitive to drops in income and to interest rate rises. Thus, higher debt translates into greater financial fragility and financial cycles that may become increasingly disruptive,” he commented.
Although fiscal stimulus and low interest rates helped to pull economies back from the brink, Mr. Caruana said they are no substitute for structural reforms. He warned that if ultra-low interest rates persist, they could create an undesirable state of equilibrium: “one of high debt, low interest rates and anaemic growth.”
Instead, Mr. Caruana recommended governments work to reverse declines in productivity and deal with structural deficiencies. “Although such reforms need to be very country-specific, they are likely to include further liberalisation of product and labour markets, revised tax codes and more focused use of public spending,” he said.