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24 Deleveraging, What Deleveraging
Figure 3.4 Inflation rates
CPI inflation, % y/y
10
9
8
7
6
5
4
3
2
1
0
01 02 03 04 05 06 07 08 09 10 11 12 13
Note: Authors’ calculations based on IMF data.
World
Developed markets
Emerging markers
Figures 3.1-3.3 suggest that output growth (and potential output growth) have
been declining (albeit to different degrees) in both advanced and developing
countries since the crisis. In addition, inflation rates have also failed to rebound
after the cyclical downturn during the crisis, such that the path for nominal
output growth is substantially lower relative to that expected before the crisis
period. If the unexpected decline in inflation persists, an implication is that
real interest rates may turn out to be higher than their equilibrium level (which
may have declined in line with the decline in potential output growth). Under
such conditions, low nominal interest rates in the context of unexpectedly low
inflation and declining potential output growth offer little consolation for debt
sustainability.
As shown by a weighted (using GDP weights) average of the nominal five-year
interest rate, the drop in this representative borrowing rate was smaller than that
of nominal GDP growth for emerging markets – and also worldwide – implying
increased strain on debt repayment prospects (Figure 3.5). In developed economies
instead, yields have declined relative to GDP growth in comparison to the first
half of the 2000s (when these economies were leveraging up), with spreads now
comparable to the late 1990s. While the fall of nominal yields has helped, the
lower bound to nominal interest rates, combined with the unexpected decline
in inflation and real growth, raises further concerns about debt sustainability. If,
due to an early tightening of monetary policy, nominal yields were to start rising
relative to nominal GDP growth, debt dynamics would be negatively affected.