March 21st, 2019

Rising global debt holding back growth, opening up vulnerabilities: central bank

By Andy Blatchford, The Canadian Press on March 14, 2019.

The Bank of Canada is seen in Ottawa on May 30, 2018. TD Securities is predicting the Bank of Canada will keep its key interest rate on hold through to the end of next year. The forecast builds on the firm's forecast last week that the central bank would not hike its key interest rate target this year. THE CANADIAN PRESS/Sean Kilpatrick

OTTAWA – The Bank of Canada’s senior deputy governor says an explosion of global debt over the last decade is a top concern that she argues is holding back economic growth and creating vulnerabilities in the world’s financial system.

The global financial system is in better shape than it was before the 2007 crisis, but unknowns such as ongoing U.S.-China trade tensions could knock things off course, said prepared remarks of Carolyn Wilkins’ speech Thursday in Vancouver.

Wilkins also warned that high debt loads usually become an “amplifying factor” when it comes to an economic downturn.

The U.S.-China trade war and expanding global geolpolitical unrest have been key worries for the Bank of Canada, she noted.

“The global development that concerns me the most, though, is rising debt,” Wilkins said in her speech at an event hosted by the University of British Columbia’s economics department and CFA Society Vancouver.

“Whether you’re a homeowner of a business person, you know first hand that high leverage can leave you in a vulnerable financial position. It’s no different for economies.

“The world has learned this lesson the hard way on many occasions in my lifetime.”

She said the combined global debt owed by governments, businesses and households now amounts to US$240 trillion, which is US$100 trillion higher than just before the financial crisis and more than three times the world’s gross domestic product.

Government debt, she added, has “skyrocketed” over the past 10 years, while corporate borrowing has “exploded” and now displays some risky qualities.

But some debt can be good thing, she said.

For instance, Wilkins said limited accumulation of public-sector debt can help stimulate economic growth, depending on how it’s used, and companies can borrow as a way to invest in expanding their capacity.

Debt levels around the world piled higher largely because of the long stretch of extremely low borrowing rates that was necessary to help global growth build fresh momentum, she said.

“The downturn would have been even deeper and more painful without these decisive policy responses,” Wilkins said.

“What strikes me, though, is how much overall leverage has grown globally, even as the financial sector has repaired its books.”

She said Canada’s high household debt – which is now more than 178 per cent of disposable income – is the central bank’s top domestic financial vulnerability.

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