The mood at the World Economic Forum's annual gathering in the Swiss ski resort of Davos will be far more downbeat this year than in the recent past.
As geopolitical problems and conflicts piled up during 2023, the world economy continued to be stalked by a danger that's shadowed it for some time: debt.
The problems and dangers associated the growth and servicing costs of global debt will be high on the list of talking points for the 530 banking, insurance, investing and other finance executives expected to attend this year's WEF meeting.
Shamik Dhar, chief economist at BNY Mellon Investment Management, warns that the rising debt has formed a dangerous conjunction with reduced economic performance.
“It's been a combination of bad luck and some mysterious slowdown in productivity. We don't really understand what causes productivity to slow down; it's kind of this mysterious secular change that happens every 20 or 30 years or so, and there's nothing the policy framework could have done about it,” he said.
Erik Britton, chief executive of Fathom Consulting, points out that the levels of debt are problematic because they undermine long-term growth potential.
“You have to find a way of growing more rapidly to change the [GDP to debt] ratio,” he told The National at a Chatham House event in London on Thursday.
During the Davos week, the discussions over debt will reveal concerns that the amounts owed by governments are just too high. The Institute of International Finance (IIF) said global debt hit a record $307 trillion during the second quarter of 2023 – that's basically what governments, businesses and individuals owe.
The IIF warned last September that “as higher rates and higher debt levels push government interest expenses higher, domestic debt strains are set to increase”. Those who have been warning of a looming debt crunch now contend that some economies are simply too big to save.
Global debt was $226 trillion in 2020 and then $303 trillion in 2021, the biggest jump since the Second World War, according to the IMF.
The Covid pandemic forced the likes of the US, Europe and Japan to borrow more than they had intended. Then rising inflation and the accompanying upward moves in interest rates began to balloon the servicing costs of the debt.
At about $33 trillion the US owes more than the GDPs of China, Japan, Germany, the UK and France put together.
According to the World Bank's International Debt Report 2023, low and middle income countries paid an unprecedented $443.5 billion just to service their debts in 2022.
That points to the fact that “high interest rates and record debt levels have set many countries on a path to crisis,” said Indermit Gill, the World Bank's chief economist.
Davos discussions
Some feel the system itself is at fault and is the root cause of runaway debt. The consensus global macroeconomic framework, they say, should be torn up.
“Policy has failed, in my view, even in its own terms,” said Mr Britton said.
“We need to worry less about technical stuff like controlling inflation, stop worrying about using policy to offset the business cycle and worry more about long horizons, the externalities that go with growth – embracing, rather than trying to avoid risk.”
This framework essentially comprises independent central banks pursuing inflation targets, governments following clear rules on the levels of public debts and robust regulators who make sure that everybody follows the rules, so that competition and financial stability are guaranteed.
At the international level, in theory at least, the IMF and the World Bank make sure trade flows freely and responds quickly to any unexpected shocks.
The lower interest rate and quantitative easing polices that central banks adopted in the wake 2008/2009 global financial crisis encouraged the accumulation of debt at an unprecedented rate which, when the era of cheap money ended with a rapid rise in inflation and interest rates to match, led to higher debt serving costs and increased risk of defaults.
Others, like Creon Butler, director of the Global Economy and Finance Programme at Chatham House, contend that while the system has faults and has been tested, especially since the global financial crisis, it's vital that “we don't give up on what we have”.
“Where I disagree is that we should blame this framework for what has happened,” he said.
“There are structural reasons why growth has been low and volatility has been high.”
Shifting the focus
The debt issue should be a major theme at in Davos next Wednesday, during the closed-door Financial Services Governors Meeting which, according to Reuters, will be attended by more than 100 chairmen and chief executives from the worlds of banking, financial markets, insurance and asset management.
Barclays chief executive C S Venkatakrishnan and the chief executive of Manulife Roy Gori will co-chair of the meeting, which should cover the debt crisis as part of the conversation on navigating risk during macroeconomic uncertainty.
But while the mounting global debt worries many economists, Mr Britton is not convinced that the discussions in Davos will be broad enough, nor the thinking long-term enough to make a difference.
“What is it that we're really trying to achieve – ultimately, in the long-run? he asked The National.
“Not today, short-run dynamics, but real long-run in relation to real standards of living.
“That's where the focus should shift.”
