# following unsustainable housing market booms (Mian and Sufi 2009).

The recent rise in U.S. private debt is less pronounced than that observed prior to previous recessions, mostly due to deleveraging by households and banks since 2009. However, U.S. corporate debt has risen significantly, increasing the likelihood that corporate bond defaults could amplify the next downturn (FSOC 2018). In the euro area, the risk of a sharper-than-expected slowdown has risen amid growth disappointments since mid-2018, decelerating global trade, and elevated policy uncertainty. Renewed financial stress in vulnerable economies would lead to slower investment, higher unemployment, and new concerns about banking sector health.

Risks to China’s growth outlook are also tilted to the downside. While fiscal and monetary policy stimulus could offset the adverse effect of trade tensions with the United States, it would delay efforts to contain credit growth and the buildup of balance sheet vulnerabilities of nonfinancial corporates, local governments, and financial institutions (World Bank 2018b). The materialization of these risks could have significant adverse repercussions on activity. Although the authorities hold policy levers to mitigate such repercussions in the near term, continued fiscal and monetary stimulus could become ineffective over time while adding further leverage to private and public sectors. Providing stimulus through state-owned enterprises may eventually undermine economy-wide productivity growth. In other EMDEs, private debt levels and growth rates have been well above those during previous credit booms—two-thirds of which ended in growth slowdowns and more than one-third in financial crisis (Acharya et al. 2015).

# 6.5 Combination of risks leading to global downturn

These pervasiveness of vulnerabilities increases the danger of a broad-based downturn in major economies that could trigger a global downturn. The United States, the euro area and China together accounted for nearly 50 percent of global GDP and are the primary sources of spillovers to EMDEs other than China via trade, financial, commodity, and confidence channels (World Bank 2016a, Kose et al. 2017b, Huidrom et al. 2019a). After one year, a 1 percentage point growth shock in these economies could curtail global growth by 1.7 percentage points and EMDE growth (excluding China) by 1.4 percentage points.

# 6.6 Long-term challenges

EMDEs face a further weakening of potential growth over the next decade (Figure 11; Ruch 2019b). Their potential growth is expected to be about 1.6 percentage points weaker than before the global recession, at 4.3 percent on average in 2019-27 (World Bank 2018b). Productivity growth has declined as the growth of productivity-enhancing investment has slowed, gains in factor reallocation (including the migration of labor from agriculture to manufacturing and services) have faded, and growth in global value chains has moderated. Slower investment growth has tempered capital accumulation. Demographic trends have also turned less favorable to growth since the share of working age populations in EMDEs peaked around 2010. Many of these factors will weigh on potential growth over the next decade. Commodity exporters face the additional challenge of prospects for weaker