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IMF projections question G7’s commitment to tackling debt

IMF managing director Christine Lagarde.


When the Great Recession wreaked havoc on the public finances of major advanced economies, the standard narrative was that governments would move to rein-in spending. The latest IMF projections, however, might prompt a rewrite. The debt-to-GDP ratios in all the G7 economies are projected to be considerably higher in 2017 – a full ten years after the onset of the crisis.

An analysis of the IMF's latest medium-term projections shows that over the 2007-2017 period the level of debt is projected to increase at a faster pace than growth in output in each of the major economies further pushing up the debt-to-GDP ratio. In 2007, debt ratios ranged from a low of 44 per cent in the United Kingdom to a high of 183 per cent in Japan. But, with the level of debt projected to grow faster than their respective economies, the debt-to-GDP ratio is slated to be higher in all G7 nations in 2017 compared to 2007. By 2017, the ratio is expected to range from a low of 71 per cent in Germany to a high of 257 per cent in Japan (see attached table).

In nominal terms the total value of goods and services produced is projected to be larger in all the G7 countries in 2017 compared to a decade earlier, but growth rates are expected to vary widely. For instance, the IMF projects that by 2017 Japan's economy will only be 1 per cent larger than it was in 2007 whereas at the other end of the spectrum, Canada's economy will be 46 per cent bigger, the U.K.'s 42 per cent and the United States at 40 per cent. The major European economies are also projected to grow but at a considerably slower pace. For example, France's economy is estimated to be 31 per cent larger followed by Germany at 24 per cent and Italy at 12 per cent.

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Since 2007, national debt levels have been exploding in all the major advanced economies. By 2017, the level of government debt is expected to more than double in the US, rising from $9.4-trillion dollars in 2007 to $22.3-trillion. The debt outlook for the UK is even more dramatic. That country's national debt is projected to hit £1.7-trillion in 2017, a jump of £1.1-trillion from its 2007 level. Canada's debt level is expected to top $1.6-trillion in 2017, up from about $1-trillion in 2007. In France, Germany and Italy, debt levels are projected to top €2-trillion in each country and Japan is expected to tack on another ¥39-trillion in debt.

With public finances that are already at abysmal levels, the projected deterioration in the debt levels of all the major advanced economies will continue to challenge the ability of governments to service these debt levels. The best way out of the debt trap is via economic growth but despite letting loose vast amounts of monetary and fiscal stimulus growth has failed to gain traction. Indeed, the latest data shows that GDP is heading down not only in the G7 economies but it is also decelerating sharply globally. The bottom line is that winding down these mountainous debt levels will take a long time and will act as a brake on economic growth. It looks like this decade will be the decade of the 'Great Stagnation' in the G7 economies.

Economist Ranga Chand is president of Chand Carmichael & Company.

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