Macroeconomic themes: Global Growth, Central Banks, Global Debt

Global growth had been relatively stable around 3.5% until 2018. It slowed in 2019 and collapsed in 2020 due to Covid. Low base effects and the vaccination driven recovery has elevated growth in 2021 and 2022. Longer term global growth is forecast to settle at a slightly lower than trend rate of 3.3% by 2025.

The key motivation of this lower expected growth rate is the fact that the pandemic driven global contraction has created a dangerous divergence in economic prospects across countries, particularly historically higher growth emerging markets. Vaccine access and early policy support are the principal drivers of the gaps. Then there are also the usual suspects weighing on growth. Potential output growth has been lowered due to aging populations in many economies and lower capital and productivity growth with minimal significant fixed investment outside the Asia Pacific region. The 30 economies in the Developing Asia group (including China, India, and Indonesia) are forecast by the IMF to generate 43% of global real GDP growth (USD terms) in the five years to 2025. China has been the key global growth driver, but has slowed down due to increased regulation, high debt constraints and an increased inward orientation.

Central banks target stable prices to ensure the unemployment rate is consistent with the economy’s potential. Amid the recovery in global demand, cost pressures are building. Imbalances have been particularly large in commodities’ markets, including energy and food.

Over the past 12 years, central banks in advanced economies have pushed their policy rates to near zero, actively used forward guidance and introduced special lending programmes followed by large scale asset purchases to support their economies through several crises. These monetary interventions have massively increased central bank balance sheets. The sizable increases in the share of government debt owned by central banks had not resulted in rising inflation expectations until post Covid. Now that the economies are progressively recovering, inflationary pressures in the global economy have rekindled the debate on the link between money growth and price stability. As a result, investors should expect higher interest rates sooner rather than later, as central banks shift towards less accommodative monetary policies to counteract inflation where their economies have a lower potential output growth trajectory. Central bank actions will include raising policy rates, among emerging markets. Among advanced economies, expect quantitative easing tapering and the potential for some interest rate hikes.

Global debt rose to a new record high of $297 trillion in Q2:2021. Debt as a share of gross domestic product fell to around 353% in the second quarter, from a record high of 362% in Q1:2021. Global government debt is expected to remain at near record-high levels of around 100% of GDP in 2021 and to decrease slightly through to 2026. High debt loads will likely also be a powerful incentive for policymakers to further suppress interest rates. High debt levels are a constraint on growth.

Net financial flows have fallen for two consecutive years in low- and middle-income countries due mainly to lower equity flows. China was the largest recipient of these net financing flows in 2020. China’s overall debt was 270.1% of gross domestic product at the end of 2020, up from 246.5% at the end of 2019. The Chinese government’s efforts to control domestic debt levels especially in the speculative property market have resulted in debt defaults raising fears of potential for a financial crisis in China’s state-dominated banking sector. Since the Great Financial Crisis there was a shift towards market-based finance where debt securities assumed a greater role in the international financial system than bank lending.

As advanced economy central banks taper their asset purchases, they are likely to reduce liquidity at a time when fiscal deficits remain high and require funding in the bond market together with a rising level of debt roll-overs. Global yield curves will be highly sensitive to the current monetary tightening phase.