The phrase ‘double-dip’ hasn’t been prevalent in the business media for at least a couple of months. But the threat of another global, synchronised downturn is still real. Australia’s booming commodities market and solid banks spared us from the worst of the financial crisis, but it was a different story overseas, where stimulus and bail-out packages within recession-hit economies have spawned a new threat.
By shifting burdensome private debt onto the public balance sheet, the sovereign debt problems of the US and Europe will loom over global markets for years to come. It has brought an unfamiliar phenomenon to the developed world: a sovereign debt crisis.
Since 2002, the US has been operating in budget deficit, its net debt has grown to 59 per cent of GDP, and the IMF has forecast US net debt to balloon to 85 per cent of GDP by 2015. The US has operated in a downward debt spiral for many quarters, according to AMP Capital Investors (AMP CI), and will continue to do so – despite recent macroeconomic data that its economy is improving and some upbeat growth forecasts. In Europe, Germany is the major worry.
Its net debt as a percentage of GDP has increased steadily over the past 20 years to 56 per cent, and its large economy is exposed to the threat of contagion from the smaller ones it has bailed out, Greece and Ireland, and those it might also have to, Portugal and Spain. In contrast to the sovereigns’ malaise, the corporate bond sectors in the US and Europe are well into the recovery phase out of the financial crisis.
In the US, net corporate debt has fallen to the lowest levels in more than a decade – but this has been overshadowed by spiralling US national debt, which is creating systemic risk.
AMP CI categorises the US and Europe as operating in a credit ‘downturn’, typified by credit contraction and corporate deleveraging. In the long recovery ahead, how capably these economies tame their excessive public debts will be crucial if a double-dip recession is to be avoided.