A new global economic study documenting continued weak growth and high unemployment rates since the worst of the Great Recession contains a stern message for the United States and other countries that are running up their long-term debt without adequate concerns about further adverse economic fallout.
A third-quarter IHS Global Risk Service report by IHS Markit, an international analytical consulting group, warns that most regions worldwide will be stuck in “low gear” for several more years, with relatively weak growth and high unemployment that will prevent the world economies from returning to pre-Great Recession levels for some time to come.
“Weak global economic growth and high world debt and unemployment rates mean the ongoing economic expansion could be derailed by shocks, such as a banking crisis, social turmoil and geopolitical conflicts,” Farid Abolfathi, senior director, IHS Markit, said in a statement accompanying the report. “Furthermore, the reduced lending capacity of the global banking system since the Great Recession and Eurozone sovereign debt crisis mean global economic growth could remain below its potential for several more years.”
While there’s no risk that the U.S. or Japan with their high debt-to-GDP levels will face the same sovereign default that beset the Mediterranean Eurozone, the report states, “Nevertheless, the United States and Japan cannot continue to run large fiscal deficits forever, given the countries unfavorable demographic outlook and rapidly rising cost of their public health programs.”
Echoing the warnings of many conservative Republicans, the non-partisan Congressional Budget Office (CBO) and a slew of public spending watchdogs and deficit hawks, the HIS report stressed that “Without major, painful adjustments in their fiscal policies, they would inevitably run into either an inflationary or deflationary crisis.” The report pointed to an aging U.S. population that in the coming years will be making more and more demands on Social Security, Medicare and other health care and entitlement programs that will drain more and more resources from the budget – and push up the debt again to historic levels.
For the first time since the aftermath of the Great Recession in 2009, the U.S. budget deficit has begun to rise again, prompting warnings from some budget analysts and policy makers that the government may once again face an era of massive revenue shortfalls and ballooning spending on major entitlement programs for seniors as well as defense and domestic programs. The CBO late last week reported that the deficit for the fiscal year that ended Sept. 30 would total $588 billion, or about a third larger than the deficit of the previous fiscal year.
Without any change in current law, the publicly held debt is projected to grow by $9 trillion over the coming ten years, from $14.1 trillion this year to $23.1 trillion, according to CBO estimates. The gross national debt, which includes inter-governmental borrowing from Social Security and other trust funds and accounts – is projected to grow by about $8.8 trillion over the coming decade, from $19.4 trillion to $28.2 trillion.
However, neither of the presidential candidates is promoting an agenda that would slow the rate of growth of spending and the rising federal deficits and debts. Republican presidential nominee Donald Trump’s massive tax cuts for individuals and businesses and spending initiatives would add $5.3 trillion more to the debt than currently projected, according to the Committee for a Responsible Federal Budget. Democrat Hillary Clinton’s major spending agenda and tax hikes would result in a net $200 billion increase in the debt over the coming decade.
Global economic risk or danger, as measured by the IHS Global Risk Service short-term risk index, has been on the ascent since late 2014 and is now holding at troubling elevated levels compared to measurements taken before the financial crash and recession beginning in December 2007. This was the eighth consecutive quarter that the short-term world risk index had gone up since the fourth quarter of 2014.
Indeed, among the 147 countries that experienced a change in their status during the third quarter, an overwhelming majority of 108 showed increased danger signs while only 39 countries saw an improvement. The United States, Canada and Japan showed the lowest risk scores for now, followed by New Zealand, Australia, Sweden and Singapore. Germany, the European economic power house, ranked 12th worldwide, while the United Kingdom ranked 33rd.
Russia, which has struggled with its domestic economy and plummeting oil revenues, ranked just 197. And dangerously troubled and unstable countries including North Korea, Bolivia, Angola, Haiti and Azerbaijan, brought up the rear.
In similar fashion, the aggregate risk scores of six of the eight regions surveyed rose during the past quarter, while only two regions showed improvement.
The six regions that saw a deterioration in their standings included Asia-Pacific, Middle East and North Africa, Sub-Saharan Africa, Central Europe and the Balkans, Commonwealth of Independent States and North America. The index showed improvement in only two regions: Latin America and Caribbean and Western Europe.
The study said it was doubtful that there would be any major improvement in the risk index in the coming quarters in light of the relative weakness of the world economy, with any major recovery not likely to prove sustainable. Moreover, political risks are on the rise again because China and Russia “are playing dangerous geopolitical games and rapidly raising their military budgets,” while Western powers “seem to have lost their strategic focus and are reducing their military spending.”
While risks remain relatively low by historical standards, according to IHS, they have grown considerably in many developing countries, such as the Democratic Republic of the Congo, Brazil, Burundi, South Africa, Turkey, and Venezuela – thanks largely to growing political instability and violence, the report says. Uncertainty over the outcome of the U.S. presidential election in November and the surprise decision by the United Kingdom earlier this year to pull out of the European Union, have also pushed the meter in a negative direction.
“Growing income gaps and poor employment prospects for large segments of the world population have increased social tensions and raised the risk of political instability and turmoil,” Abolfathi said in his statement. “It is also worth keeping in mind that dealing with the Great Recession and Eurozone crisis has greatly diminished the capacity of governments and civil societies for addressing social and political problems, which can lead to escalating sociopolitical tensions and government destabilization.”