WEF president gives chilling warning about global debt, stagflation

Global public debt is approaching its highest level since the Napoleonic Wars, according to the WEF president
By Sam Bourgi
•
06 May 2024
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The head of the World Economic Forum (WEF) has warned that global debt is spiraling out of control, raising the risk of a "lost decade" of growth driven by high inflation.

Speaking at an event in Riyadh, Saudi Arabia, WEF President Borge Brende said global debt has reached the highest level since the Napoleonic Wars.

“The global growth [estimate] this year is around 3.2 [%]. It’s not bad, but it’s not what we were used to—the trend growth used to be 4% for decades,” Brende said.

“We haven’t seen this kind of debt since the Napoleonic Wars; we are getting close to 100% of the global GDP in debt,” he explained.

Debt to GDP measures a country’s public debt relative to its gross domestic product. The higher the ratio, the more debt a nation has relative to its economic output.

Across the world, public debt to GDP has reached a staggering 93%, which is nine percentage points higher than pre-pandemic levels.

The International Monetary Fund estimates that global debt could hit 100% of GDP by 2030.

From high inflation to stagflation

Although high public debt has always been a concern, it's much more of a threat in tandem of high inflation.

As the Federal Reserve and other central banks struggle to contain inflation, Brende believes advanced economies are setting themselves up for “stagflation.”

Stagflation is the worst of two worlds: low economic growth and high inflation.

“Investors really have to start positioning themselves for [...] The resurgence of the stagflation debate,” said Jeffrey Roach, chief economist at LPL Financial.

JPMorgan CEO Jamie Dimon agrees that stagflation is within the realm of possibility.

In an interview with The Wall Street Journal, Dimon drew parallels between today and the 1970s, when inflation blasted through the roof, catching many off guard.

“I point out to a lot of people, things looked pretty rosy in 1972—they were not rosy in 1973,” Dimon said.

Wells Fargo analysts also warned that today's economy mirrors past episodes of stagflation—namely, external shocks like rising oil prices, higher federal deficits, and low unemployment.

“Those dynamics mirror the current environment, as the unemployment rate is at a decades low and fiscal deficit is swelling,” Wells Fargo analysts wrote.

No longer a blip

Experts blame the recent uptick in inflation on rising oil prices, which eclipsed $90 a barrel in April.

According to the Senate Banking Committee, every $10 a barrel jump results in a 0.2% increase in inflation and a 0.1% drop in economic growth.

In fact, gasoline and rent prices drove half of the increase in the Consumer Price Index in March, according to data from the Bureau of Labor Statistics.

“A $100 oil scenario of the type discussed by many observers, would only briefly raise monthly headline inflation, before fading rather quickly,” wrote Dallas Fed researchers Lutz Kilian and Xiaoqing Zhou.

“However, the short-run effects on headline inflation would be sizable.”

If history is any indication, inflation in energy prices tends to be short-lived, but that doesn’t necessarily mean that inflation will immediately give out.

The recent string of red-hot inflation reports “means that the stalled disinflationary narrative can no longer be called a blip,” said Seema Shah, a global strategist at Principal Asset Management.

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