High debt and slow economic growth are making for a “poisonous combination” that could bring the world into another financial crisis, according to an academic study urging international governments to improve co-operation at financial policy-making.
The 16th annual Geneva report argues that prior to the 2008 financial crisis, advanced economies had increased debt beyond their capacities to bear it — and it now appears China could be in a similar situation.
“In a poisonous combination, world growth and inflation are also lower than previously expected, also – though not only – as a legacy of the past crisis,” said the September 29 report, which was commissioned by the International Centre for Monetary and Banking Studies.
The report said that if China is to avoid the same experiences faced by developed economies during the recession, it should be willing to allow growth to slow down naturally.
Its own natural decline in the growth rate, the study said, has been “temporarily obscured” by Chinese policy-makers’ willingness to let organizations to take on more debt than what the country can realistically bear in the event of a market shock.
The study also noted the extended period of low interest rates that developed economies have experienced since the recession “is creating incentives for investors in search of yield to take excessive risk.”
In turn, financial regulation by itself is not preventing groups from accumulating even more debt than prior to the recession.
