The United Kingdom’s June 23 vote to leave the European Union adds downward pressure to the world economy at a time when growth has been slow amid an array of remaining downside risks. The first half of 2016 revealed some promising signs—for example, stronger than expected growth in the euro area and Japan, as well as a partial recovery in commodity prices that helped several emerging and developing economies. As of June 22, we were therefore prepared to upgrade our 2016-17 global growth projections slightly. But Brexit has thrown a spanner in the works.
A year ago our research showed Europe had an €800 billion stock of bad loans. In our latest Global Financial Stability Report we show that the problem has now grown to more than €900 billion. This stock of nonperforming loans is concentrated in the hardest hit economies, with two-thirds located in just six euro area economies. The European Central Bank’s Asset Quality Review confirmed this picture, which revealed that the majority of banks in many of these economies had high levels of nonperforming assets (see chart 1).
The Mundell-Fleming lecture by Ricardo Caballero (MIT), presented to the IMF's 10th annual research conference, drew a striking parallel between a sudden cardiac arrest and a financial crisis. The best option during a sudden cardiac arrest is to use a defibrillator. Ricardo argued that, using the analogy between the two events, we need to have “financial defibrillators” readily available during financial crises as well.
One obvious fallout of the global financial crisis is a huge deterioration in fiscal conditions, particularly in advanced countries. The numbers are nothing short of staggering. Gross general government debt in the G-20 advanced economies is projected to approach 120 percent of GDP by 2014, up from about 80 percent in 2007, and this is even assuming no renewal of fiscal stimulus beyond 2010.