Global Debt Reaches 330% of World GDP

Global Debt Reaches 330% of World GDP

  • Global debt to reach an all-time high of $255 trillion at the end of 2019.
  • Per capita debt will hit almost $32500 for the 7.7 billion world population, reports IIF 
  • Investors and economists are alarmed by the rising debt worldwide.

Led by the big economies of the US and China, global debt is all set to topple the record by exceeding $250 trillion.

The report by the International Institute of Finance (IIF) showed that the surge of $7.5 billion in the first half of 2019 will result in global debt exceeding $255 trillion dollars by the end of the year.

Debt levels can be broken down into four categories as follows:

  • Household debt: $47.2 trillion
  • Non-financial corporate: $74.2 trillion
  • Government: $68.4 trillion
  • Financial corporate: $61 trillion

The report also compares the increase in the numbers since the global financial crisis of 2009.

“China and the US accounted for over 60% of the increase. Similarly, the emerging market’s debt also hit a new record of $71 trillion which is 220% of their GDP. 

Debt is increasing all across the world. Whether its big economies like the USA, Japan, China or the emerging markets, the debt is increasing. This is seen as the next breaking point by a number of economists. While there is an economic slowdown seen in the world, amid trade wars and other factors, this increase in global public debt can change the monetary world as we know it.

Based on the data reported by the IIF, we divided up countries into three groups based on their debt profile and here are the results.

  • Advanced Economies:  the big chunk of global debt accounts to government and non-financial corporate debt standing at more than $71 trillion, mostly driven by big economies of the US, China, and Japan. More than a $17 trillion increase was added this year.
  • Emerging markets: Emerging market debt also hit a new record of $71.4 trillion which is 220% of their GDP. Strong growth in the emerging housing sector has helped growing household debt to $46 trillion, more than a 30% increase. This growth has mostly come from China, houwever other countries including India, Malaysia, and Korea have also increased debt levels since 2016. The bulk of the increase in emerging market debt has been in the non-financial corporate.
  • Developing Countries: most developing countries run on a deficit budget and are therefore forced to cover their expenses by borrowing or, in the worst-case scenario, by being bailed out by international financial institutions or governments, resulting in the rapid increases in the public debt.

“With diminishing scope for further monetary easing in many parts of the world, countries with high levels of government debt (Italy, Lebanon)—as well as those where government debt is growing rapidly (Argentina, Brazil, South Africa, and Greece)—may find it harder to turn to fiscal stimulus” reports IIF.

“The deepening of the global bond market is the reason behind the rise in global debt levels” cited by IIF “increasing from $87 trillion to 115 trillion dollars since 2009”. The global bond market has been crowded lately by the investors as they sense uncertainty due to the US-China trade war, Brexit and worldwide growth slowdown.

The rising interest rate and tightening financial conditions in many countries have clouded the prospects of bringing down global debt. However, the IMF and many central bankers don't seem to be worried about these rising debts. Many of them argued that these debt levels do not mean that the world is looking at another financial crisis. As Jerome Powell, Federal Reserve Chairman said in testimony before House Budget Committee, “If you look at today's economy, there's nothing that's really booming now, that would want to bust. In other words, it's a pretty sustainable picture.”

Challenges debt poses to the world

The most crucial victim of rising global debt would be the effort to tackle climate change. Climate change efforts already face hurdles since the US pulled out of the Paris accord. the IPCC estimates a cost of $3.5 trillion in order to prevent temperatures from rising more than 1.5 (degrees) Celsius by 2050.

“To achieve this goal, public and private climate change financing will have to be scaled up rapidly. This is a growing source of concern for high-debt countries that also have high exposure to climate risk (e.g. Japan, Singapore, Korea, and even the U.S.). Climate-vulnerable countries with weak tax bases will face even more challenges in emerging markets” the report says “leaving some sovereigns struggling to source international and domestic capital to combat climate change”.