France economy

Private debt will weigh on global economic recovery – IMF Blog

By Silvia Albrizio, Sonali Das, Christoffer Koch, Jean-Marc Natal and Philippe Wingender

عربي, 中文, French, 日本語, Português, Русский

A record rise in private debt could slow the economic recovery, but the drag on growth will vary across and within countries.

Governments have managed to ease the economic pain of the pandemic by providing plenty of liquidity to stricken consumers and businesses through credit guarantees, concessional loans and interest payment moratoriums.

But while these policies have proven effective in supporting balance sheets, they have also led to a surge in private debt, prolonging a steady rise in leverage spurred by favorable financial conditions since the 2008 global financial crisis.

Global private debt grew by 13% of global gross domestic product in 2020, faster than the rise seen during the global financial crisis and almost as fast as public debt.

We estimate that recent debt levels could slow economic recovery by 0.9% of cumulative GDP in advanced economies and 1.3% in emerging markets on average over the next three years.

A bigger drag of debt

However, the aggregate numbers don’t tell the whole story. The impact of the pandemic on household and business finances has varied across and within countries, reflecting differences in their policy responses and the sectoral composition of their economies.

For example, contact-intensive services such as entertainment contracted as people stayed home, but production and exports of computers, software and other goods increased as consumers were spending more on devices. The impact on the balance sheets of consumers and businesses, especially those most exposed to the pandemic, has been very different depending on the support provided by governments.

Our analysis shows that the drag on post-pandemic growth could be much greater in countries where (1) debt is more concentrated among financially strained households and vulnerable businesses, (2) fiscal space is limited, (3) the insolvency regime is inefficient, and (4) monetary policy needs to be tightened quickly.

Low-income households and vulnerable businesses (highly indebted, unprofitable businesses that struggle to pay interest) are generally less able to sustain high levels of debt. As a result, they are expected to make deeper cuts in consumption and investment spending going forward. The drag on future growth is therefore expected to be greatest in countries that have seen the largest increases in indebtedness for low-income households and vulnerable businesses during the pandemic.

Consumers in China and South Africa saw the largest increases in household debt ratios among countries for which detailed data is available. But the experience of households in these two countries was very different: in China, indebtedness increased the most among lower-income households, while higher-income households accounted for most of the increase in South Africa.

Among advanced economies, low-income households in the United States, Germany and the United Kingdom saw comparatively larger increases in debt than those in France and Italy, where indebtedness actually fell. for the poorest households.

The impact of the pandemic on businesses has also varied. Vulnerable businesses – heavily concentrated in contact-intensive services – have often borrowed to survive the drop in revenue caused by the pandemic. Future investments are therefore likely to be lower in countries where the share of contact-intensive sectors is higher.

Rising inflation and interest rates

As economies recover and inflation picks up, governments should consider the impact of tighter fiscal and monetary policies on the most financially strained consumers and businesses when accelerating the exit from fiscal policies. extraordinary support.

For example, we estimate that a surprise tightening of 100 basis points would slow investment by the most indebted companies by a cumulative 6.5 percentage points over two years, four percentage points more than for the least indebted companies. .

When the recovery is well underway and balance sheets are healthy, fiscal support could be reduced more quickly, making it easier for central banks to do their job. Elsewhere, governments should target budget support to the most vulnerable in the transition to recovery while remaining within credible medium-term fiscal frameworks.

To prevent a rapid tightening of monetary policy from causing significant and potentially long-lasting disruptions, policymakers need to pay close attention to adverse developments in the financial sector.

This is particularly important in countries where a wave of bankruptcies in sectors heavily affected by the pandemic could spread to the rest of the economy. Governments in these countries could encourage restructuring rather than liquidation and, if necessary, extend solvency support.

Insolvency, restructuring schemes

Authorities should also strengthen restructuring and insolvency mechanisms (through dedicated out-of-court restructuring, for example) to promote rapid reallocation of capital and labor to more productive firms.

Similarly, if large household debt threatens the recovery, governments should consider cost-effective debt restructuring programs aimed at shifting resources to relatively vulnerable people who are more likely to spend their income. These programs should, by design, seek to minimize moral hazard.

In short, the recent surge in household and corporate debt poses risks to the pace of the recovery. Yet this risk is not evenly distributed. Careful, real-time monitoring of the balance sheets of low-income households and vulnerable businesses is key to calibrating the outcome of support measures. This could prevent sudden distress when financial conditions tighten.

—This blog, based on Analytical Chapter 2 of the April 2022 World Economic Outlook, “Private Sector Debt and the Global Recovery,” also reflects endorsement from Evgenia Pugacheva and Yarou Xu.