The next global economic slowdown could come from rising risks outside the banking sector, according to the International Monetary Fund.
Leverage in the non-financial sector for G-20 economies as a whole has surpassed its pre-financial crisis high, the IMF said in its Global Financial Stability Report released Wednesday.
Nonfinancial sector debt refers to borrowing by governments, nonfinancial companies and households. The total level of that debt for G-20 economies rose to $135 trillion, or about 235 percent of aggregate gross domestic product in 2016, surpassing the debt-to-GDP ratio of 210 percent in 2006, before the financial crisis, according to the IMF.
Low borrowing costs and muted financial market volatility “support a sanguine view of risks to the global economy in the near term,” the report said. “But increasing leverage signals potential risks down the road, and a scenario of a rapid decompression in spreads and volatility could significantly worsen the risk outlook for global growth.”
Volatility has fallen sharply amid stocks’ relentless push toward record highs. The CBOE Volatility Index, widely considered the best gauge of fear in the market, closed at its lowest on record last Thursday. Meanwhile, easy monetary policy implemented in the wake of the financial crisis has kept global bond yields low, pushing investors into riskier assets with higher returns.
“As the search for yield intensifies, vulnerabilities are shifting to the nonbank sector, and market risks are rising,” the IMF…