Tomorrow marks the 10th anniversary of the collapse of investment bank Lehman Brothers which intensified the global financial crisis that then rippled around the world. The crisis, which prompted emergency action from central banks, eventually passed after a slow economic recovery in which, for example, US employment levels took over four years to recover to pre-crisis levels. While the US economy is growing strongly and the European Union and Japan have also turned the corner, many of the crisis' legacies still persist and have also led to the emergence of new vulnerabilities.
As a result of a decade of near-zero interest rates in the major economies, the build-up of government, household and corporate debt in other countries around the world has accelerated. A recent study by the McKinsey Global Institute found that from 2007 to last year, total global debt rose by more than 70 per cent to US$169 trillion (S$232 trillion). This is of concern because the interest rate environment is now changing. With the US economy at near-full employment and in the midst of a fiscal stimulus, the US Federal Reserve is tightening monetary policy, forcing other central banks to follow suit. Many economies, especially those with elevated levels of household debt and high shares of variable-rate mortgages - such as Sweden, Canada, Australia and Hong Kong - are vulnerable to property market corrections.