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 in 2007 before the financial crisis, but unknowns such as ongoing U.S.-China trade tensions could knock things off course, Carolyn Wilkins said in a 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 geopolitical 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 or 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 a 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.”
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, she said.
“The good news for Canadian businesses and households is that the financial system – globally and here at home – is safer than it was a decade ago thanks to much stronger safeguards,” she said.
Wilkins added it’s important for policy-makers around the world to continue efforts to conduct stress tests on different parts of the financial system, and, when necessary, put in safeguards.