A protracted trade war may be the final blow that will sink the indebted world economy
- Global debt is growing faster than the global economy, which is simply not sustainable
- And as the US-China trade war drags on, major economies that are reliant on the global supply chain are running just to stay in the same place
In Carroll’s book, Alice gets into a race with the Red Queen, only to find that, although she runs faster and faster, she gets nowhere.
A surprised Alice says that, in her country, “you’d generally get to somewhere else – if you ran very fast for a long time”. “A slow sort of country!” replies the Red Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”
“The debt is growing faster than the economy, than the nominal GDP, and ultimately, in the long run, that’s not a sustainable place to be,” Federal Reserve chair Jerome Powell said last week. He was only referring to the US economy but his remarks have broader implications.
Total global debt hit a fresh high of more than US$250 trillion at the end of June, the institute said, equivalent to 320 per cent of the world’s gross domestic product. Global debt is growing faster than the global economy, the report added.
The world economy is headed for a fall and China can’t save it
Debt always has to be serviced, yet that becomes harder if economic returns aren’t generated fast enough.
As it stands, global interest rates are generally low. Debt servicing isn’t as onerous as it might be. Yet even in a low interest rate environment, many major economies continue to face challenges.
Additionally, China’s factory gate prices fell 1.6 per cent in October year-on-year, the sharpest drop since July 2016, as Chinese manufacturers reacted to adverse demand conditions.
The trade war has to be a contributing factor.
How much pain can China tolerate in the trade war? Trump will find out
Meanwhile, Japan and South Korea, both with close economic ties to China, are having economic problems.
The Japanese economy expanded by just an annualised 0.2 per cent in the third quarter of 2019, preliminary data showed last Thursday – far lower than a median market forecast of 0.8 per cent.
External demand took 0.2 percentage point off Japanese GDP growth, as exports were hit by the trade war between China and the US. Japan already has the highest government debt-to-GDP ratio of any industrial nation but it may well resort to yet more fiscal stimulus and borrowing.
Can China draw the right lessons from Japan’s trade war with US?
At the current pace of debt accumulation, major economies are running but going nowhere. The protracted trade dispute between the US and China is just making matters worse.
Quite simply, the world economy cannot afford for this trade war to continue.
Neal Kimberley is a commentator on macroeconomics and financial markets