(E. Strathmeyer, CC BY-NC-ND)
In Fiscal Monitor the IMF focused primarily on the problem of the high level of global debt. The Fund warned that public and private sector debt on a global scale amounted to USD164 trillion, higher than before the financial crisis, and constitutes over twice the value of goods and services produced each year worldwide.
Half of this debt relates to three countries: the United States, Japan and China. In the Chinese economy, the level of debt increased from USD1.7 trillion in 2001 to USD25.5 trillion in 2016, which accounted for three-quarters of the growth in private sector debt worldwide during the last decade.
According to the IMF, countries should strive to reduce the level of their debt – both public and private – in order to improve the world economy’s resilience to potential unfavorable economic conditions. Vitor Gaspar, Director of the IMF Fiscal Affairs Department, has indicated that the United States is the only developed country which is not planning to reduce debt, but which has instead recently introduced tax cuts, requiring adequate financing and simultaneously associated with a high level of public sector debt.
In the IMF’s assessment, lowering taxes and increasing public expenditure in order to stimulate growth in economic good times is a pro-cyclical activity. Therefore, the current favorable economic conditions should rather be used to reduce public sector debt through tax increases and expenditure cuts. It may provide more room for maneuver for economic policies in the case of recession. In Vitor Gaspar’s opinion, Germany and the Netherlands have such a fiscal space.
Should the financial conditions on the global markets tighten, the current favorable economic situation in the world may be at risk, the IMF also warns in the Global Financial Stability Report (GFSR).
As indicated by Tobias Adrian, Director of the IMF Monetary and Capital Markets Department, the short-term risk to global financial stability has increased over the last six months as a result of a rapid growth in volatility on the equity market, and continuing concerns of investors related to escalating geopolitical and trade tensions.
The major challenges for the medium-term economic growth outlook are weaknesses of the global financial system which have accumulated over the recent years under conditions of low interest rates and low market volatility.
In the report, three areas of sensitivity of the global financial system are highlighted:
- deterioration of credit quality;
- external threats related to indebtedness of emerging and low-income countries;
- mismatch of dollar liquidity among banks outside the USA.
The shadow banking sector also poses a threat, particularly in China; however, regulatory efforts undertaken so far are having an impact on reducing this risk.
Under such conditions, a higher level of inflation may make central banks raise their interest rates faster than expected by market participants, which could lead to a rapid tightening of conditions on the world’s financial markets. For the above reasons, although the global economic recovery has so far been resistant to significant fluctuations of the financial markets, in the IMF’s opinion investors and decision-makers should remain prudent and observe risks associated with an increase in interest rates, increased market volatility and rising protectionism.
It is worth noting that the authors of the report claim that the so-called crypto-assets market is currently still limited and does not generate an increased risk for the financial system; however, this may change if their use becomes more common unless adequate security measures are provided. Tobias Adrian emphasized that the regulatory approach to crypto-assets should simultaneously create trust in new technologies.
This opinion was also shared by participants of the panel on “Digitalization and the New Gilded Age” chaired by Christine Lagarde, the Managing Director of the IMF. In their opinion, trust should be built in relation to new technologies, such as blockchain, which may revolutionize the existing economic system. In this context, digital security was also discussed, with particular focus on the security of data, which have become a commodity. An international agreement is necessary in the scope of key principles and values associated with the use of digital data, as the panelists stressed, since in the digital economy data constitute a feedstock which is still unlimited in geographical and legal terms.
An interesting aspect in the discussion on digitalization of the economy was the issue of “technological unemployment”, which John Maynard Keynes warned about as early as 1930. To prevent exclusion from growing into a global issue, access to high quality education, thanks to a more technologically-oriented curriculum already at secondary school level, is of key importance.