Looming Disaster

Despite a succession of shocks since 2020, the global economy held up remarkably well - so far.

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But the margin for error is dwindling. Total global debt is now nearly 25 per cent higher than it was on the eve of the COVID-19 pandemic, when it already was at an all-time high. This overhang could undercut all economies’ ability to shield themselves against the latest shock: higher trade tariffs.

Although debt is crucial for driving economic growth, it should be understood as a form of deferred taxation. By borrowing rather than taxing, governments can make long-term investments that will benefit future taxpayers without burdening the current generation; or they can prop up national growth and incomes during an economic emergency, when hiking taxes would only deepen the downturn.

Eventually, however, the piper must be paid, and if national income does not grow faster than the cost of borrowing, taxes must be raised to repay the debt. Persistently high debt thus becomes a barrier to economic progress.

That barrier has seldom been higher. Over the last 15 years, developing countries got hooked on debt, which they amassed at a record-setting clip: six percentage points of GDP per year, on average. Such rapid debt buildups often end in tears. Indeed, the odds that they will trigger a financial crisis are roughly 50-50.

Moreover, this particular surge has been punctuated by the fastest increase in interest rates in four decades. Borrowing costs doubled for half of all developing economies, with net interest costs as a share of government revenues rising from less than 9 per cent in 2007 to about 20 per cent in 2024. That alone constitutes a crisis.