The global economic recovery is likely to slow this year due to a spike in private debt during the coronavirus pandemic, according to the International Monetary Fund (IMF). 

Private debt, which includes borrowings of consumers and businesses, surged by 13 percent of the world’s gross domestic product (GDP) in 2020, as governments pumped liquidity into their markets to lessen the economic impact of the health outbreak. 

The increase in indebtedness, which can lead to a sharp decline in consumption among households and investments among companies, was faster than the rise seen during the global financial crisis and almost as fast as public debt, the IMF said.  

The lender estimated that recent levels of leverage could slow economic recovery by a cumulative 0.9 percent of GDP in advanced economies and 1.3 percent in emerging markets on average over the next three years. 

The World Bank slashed on Monday its 2022 economic growth forecast to 3.2 percent from 4.1 percent, citing soaring prices of energy and food, as well as rising interest rates. “These, plus the war in Ukraine and China’s COVID-related shutdowns, are pushing global growth rates even lower and poverty rates higher,” said David Malpass, World Bank Group President. 

Vulnerable markets 

As for private debt, among those likely to feel the impact are countries that experienced the largest increases in borrowings among low-income households and vulnerable firms during the pandemic, the IMF noted.  

These include markets like China and South Africa, where household debt ratios were the largest, as well as the United States, Germany and the United Kingdom, which saw comparatively larger increases in debt than those in France and Italy. 

“Our analysis shows that the post-pandemic drag on growth could be much larger in countries where indebtedness is more concentrated among financially stretched households and vulnerable firms, fiscal space is limited, the insolvency regime is inefficient, and monetary policy needs to be tightened rapidly,” the lender said in its blog. 

It said that households with low incomes and unprofitable businesses that are struggling to make interest payments are likely less able to withstand a high level of debt. As a result, they are expected to sharply reduce their consumption and investments in the future. 

Among businesses, the biggest impact will be felt by those that are highly concentrated in contact-intensive services, which turned to lenders to survive the fall in revenues during the peak of the outbreak. With that in mind, the IMF said, future investment will likely be lower in markets that have a higher share of contact-intensive sectors. 

(Reporting by Cleofe Maceda; editing by Daniel Luiz ) 

Cleofe.maceda@lseg.com