A global debt crisis, among the main threats to the post-COVID global economy

It is not, however, the only risk facing the global economy, although the economic effects of the pandemic obviously serve as catalysts for the other threats to global growth. The latest MAPFRE Economics Outlook report identifies six major vulnerabilities and risks to the global economy during the current situation.

A global debt crisis, geopolitical tensions and frictions in global governance are the three most likely risks according to MAPFRE Economics. Furthermore, these three risks have grown over the last quarter.

Debt crisis

The most likely of these is a global debt crisis. The global debt-to-GDP ratio has risen to a new historic peak of 331 percent in the first quarter of 2020, compared to 320 percent in the fourth quarter of 2019. While it is true that increased borrowing gives agents greater financial flexibility, by lengthening maturities and reducing interest expenditures in a broadly accommodative monetary-policy environment, the current challenging outlook implies a likely deterioration in credit ratings and an increase in defaults, which could lead to solvency-related tensions.

Geopolitical crisis

This would have the most severe impact on the global economy. The evolution of the pandemic has not slowed the rise in geopolitical tensions; rather, it has had the opposite effect: the gap between the US and China continues to widen as a result of accusations of responsibility for the pandemic, the new national security law imposed on Hong Kong, and the frequent disagreements in relation to the technology sector.

In Europe, the renewed prospect of a hard Brexit is once again raising its head, crystallizing a problem that seems far from resolution, just at a time of economic vulnerability when the European Union is trying to move in the opposite direction, toward policies intended to consolidate the bloc and develop joint response mechanisms.

Gobernanza global

“With widespread fiscal and monetary involvement in providing support,” MAPFRE Economics experts explain, “policy restrictions to tackle the infection curve and labor measures to protect employment are the main factor of uncertainty. The consequences of this could lead to the need for greater accommodation in economic policy, as well as triggering a greater climate of social anger that could increase the risks affecting governance.” In this sense, the greatest vulnerabilities are emerging in countries with the most widespread outbreaks of the virus, in emerging regions where the health systems have unresolved deficiencies, and in countries where the relevance of the shadow economy and the structure, informal nature and inflexibility of the labor market expose the labor force to deeper and more permanent shocks than can be absorbed by the employment protection mechanisms that have been proposed.

Sovereign-financial crisis in China         

The likelihood of this risk materializing has declined in recent months, although it remains one of the risks most likely to impact the global economy. The Chinese economy continues to recover, accompanied by a set of expansionary economic policies that enable the accumulation of positive indicators in both manufacturing and services to be reactivated.

US economic policy

Fortunately, the US Federal Reserve has continued to play a key role during this crisis in sustaining international financial activity. Monetary easing in the world’s largest economy, as in the aftermath of the 2008 financial crisis, has once again substantially increased its role as an automatic stabilizer in the face of the crisis generated by COVID-19, extending mechanisms such as asset purchasing programs to other developing economies around the world.

COVID-19 Vaccine