OECD, IMF, IIF warn of rising debt and borrowing cost risks

Three heavyweight international institutions have simultaneously raised alarms over the dangers of mounting global debt and rising interest rates. The Organisation for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF), and the International Institute of Finance (IIF) delivered stark assessments on Wednesday, focusing on the strain from servicing $365 trillion in global borrowing.

The IIF, in its quarterly debt monitor, predicted a structurally debt-intensive future. Governments and corporations are scrambling to invest in new technologies and bear the costs of ageing societies. The institute warned that the buildup in global debt is set to accelerate as entities compete to boost growth and secure their positions in a changing economy.

Major economies face emerging-market challenges

The report drew a direct comparison between some of the world's largest economies and crisis-hit emerging markets. It stated that the United States, France, the United Kingdom, and Japan face persistently large deficits and rising interest expenses. These are challenges long associated with debt-distressed emerging market sovereigns. With many politicians facing elections soon, the IIF said the risk is that already-unsustainable debt trajectories continue to deteriorate.

UK Prime Minister Andy Burnham, speaking in New York this week, denied reports he was shocked by the state of public finances since taking office in July. He told reporters the situation changed due to the Middle East conflict.

OECD highlights fiscal and financial risks

The IIF's warning coincided with the OECD's interim economic outlook. OECD Secretary General Mathias Cormann presented the report, noting that fiscal and financial risks have grown. He warned that thirty-year government bond yields are at their highest in 15 years or more in six of the G7 economies. This means higher debt-servicing costs for strained government budgets and higher borrowing costs for businesses and households.

His words echoed a warning from IMF Managing Director Kristalina Georgieva. She told the BBC that the world's advanced economies must act to reduce borrowing and bring down debt levels. Georgieva said a succession of global economic shocks had been pushing debt levels up. She stated it is time for governments to take action to contain servicing costs, adding that political courage is needed.

Global growth forecasts and specific risks

In its forecast update, the OECD noted the global economy has shown more resilience than expected despite strains from the US-Israel war on Iran. However, it warned that prospects remain heavily dependent on achieving a durable resolution to the Middle East conflict. The OECD also identified the record-breaking El Niño weather system as a significant downside risk. It warned this could hit agricultural production and push up food prices.

The organisation provided updated global growth projections, making a modest upgrade for 2026 while slightly trimming the outlook for 2027.

For the United Kingdom, the OECD made significant adjustments to its forecasts. It cut the inflation outlook for this year sharply, while upgrading its growth projection.

The OECD said UK consumption is expected to be supported by newly announced government support measures. The report from the three bodies paints a picture of a global economy at a precarious juncture, where resilient growth is overshadowed by rapidly accumulating fiscal vulnerabilities.