Ballooning sovereign debt threatens global recovery, Standard Life warns

25th November 2014

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Developed market economies are still vulnerable to an economic shock unless more is done to boost growth and reduce debt, Standard Life Investments has warned.

Sovereign debt in the developed economies of the OECD has ballooned since the financial crisis and a renewed recession would push this to dangerous levels, the global investment manager warned. Governments and central banks should act now to reduce their fiscal imbalances, it urged.

Countries can help improve their debt outlooks by pursuing growth- friendly policies alongside prudent, long-term credible fiscal planning, according to Standard Life.

It said the best policy response should include a combination of monetary stimulus, investment in infrastructure and deep structural reform.

Without these measures, countries may resort to more painful and damaging economic policies to deal with high public debt burdens, the investment manager warned.

Jeremy Lawson, chief economist, Standard Life Investments, said:“The financial crisis has left a deep scar on public sector balance sheets across the developed world. Increases in debt, lower nominal growth rates and weakened budget positions have made governments vulnerable to another economic shock. ”

He said that improving the nominal growth outlook provides the best policy option.

“Some economies, particularly those in the Eurozone, require further monetary stimulus alongside a temporary, targeted loosening of fiscal policy.

“More generally, countries should look to boost long-term growth rates by accelerating structural reforms aimed at boosting productivity,” said Lawson.

“Public infrastructure investment is another avenue to promote growth, with the added attraction of being fiscally neutral if done effectively. Longer-term consolidation plans must also be enhanced,” he added.

 

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