The world economy has steadily recovered since the tumultuous days of the 2008 financial crisis. However, familiar risks reappear with this resurgence, and new challenges emerge. At the heart of the previous crisis was the issue of excessive debt, particularly in the US real estate market. The aftermath saw a collapse of financial giants, millions losing jobs and homes, and a global recession taking hold.

A decade later, the global financial system appears safer, but as we delve into the present situation, it becomes evident that risks persist. In this article, we draw upon a decade of research on financial markets to dissect the changes in the economic terrain and extract valuable lessons for today’s investors.

Global debt continues to grow: A closer look

As the echoes of the 2008 crisis reverberate, one alarming trend persists – global debt continues to surge. Governments, nonfinancial corporations, and households have accumulated an additional $72 trillion in debt since 2007. Beneath this staggering figure lies a nuanced narrative, with governments in advanced economies and nonfinancial companies worldwide contributing significantly. China, in particular, stands out, accounting for more than one-third of global debt growth, with its debt reaching a staggering $29.6 trillion by mid-2017. It represents a fivefold increase over the past decade, bringing China’s debt on par with advanced economies.

Growing government debt: A pervasive challenge

The financial crisis of 2008 triggered a shift in debt from the private sector to governments. Between 2008 and mid-2017, the global government debt reached $60 trillion, doubling. Notably, within the Organisation for Economic Cooperation and Development (OECD), several countries now face the challenge of government debt surpassing their annual GDP. The specter of potential sovereign defaults and anti-EU sentiments periodically strain the eurozone, underscoring the high levels of government debt that set the stage for future spending battles.

Corporate borrowing in the era of ultra-low interest rates

The prolonged period of historically low-interest rates has facilitated a doubling of global nonfinancial corporate debt, reaching $66 trillion by mid-2017. What sets this period apart is the significant contribution from developing countries, particularly China, where corporate debt has soared to 163 percent of GDP. The shift from bank lending to a surge in corporate bond issuance reflects the deepening of global capital markets. However, concerns loom, mainly when debt is denominated in foreign currencies, as seen in the cases of Turkey, Chile, and Vietnam.

Households: Lessons from the ground

While households in advanced economies were at the epicenter of the 2008 crisis, the past decade has witnessed a reduction in household debt, albeit with nuances. In the United States, the epicenter of the crisis, households have managed to decrease their debt by 19 percentage points of GDP, with a notable decline in mortgage debt. However, rising student debt and auto loans raise concerns, and broader measures of household financial wellness remain troubling, with a significant portion of adults unable to cover unexpected expenses.

Banks: safer but struggling

Post-crisis, substantial efforts were made to fortify banks against future shocks. Although the Tier 1 capital ratio has experienced a significant increase, banks’ profitability has declined. Since the financial crisis, banks in advanced economies have witnessed a halving of their return on equity (ROE), with European banks facing the most substantial impact. The rise of digital disruptors poses additional challenges as traditional banks grapple with the need for new business models and revenue growth.

The less interconnected financial system

A noteworthy change in the financial landscape is the reduction in international financial activity. Gross cross-border capital flows have halved since 2007, contributing to a less interconnected global financial system. Eurozone banks have retreated from international activities, becoming more localized. Global banks, generally, have sold over $2 trillion in assets since the crisis, reflecting a reassessment of risk and a focus on domestic lending.

New risks on the horizon

Despite positive changes, new risks demand attention. Challenges are associated with the rise of collateralized loan obligations, the growth of corporate debt in developing countries, and the potential for real estate bubbles. The financial landscape is also evolving, with digital disruptions, cryptocurrencies, and geopolitical tensions adding uncertainty. Investors must remain vigilant, as history teaches that the next crisis will be unique and may emerge when times seem stable.

As we reflect on the lessons gleaned from historical economic crises, it is clear that the global financial system has evolved, but challenges persist. Investors must navigate shifting debt dynamics, changing banking paradigms, and emerging risks. The resilience of the system is evident, but prudent vigilance remains paramount.

The echoes of 2008 serve as a reminder that economic stability is fragile, and careful consideration of the evolving financial landscape is crucial for today’s investors.

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