What is going on with global debts and why it is important?
The world’s debt-to-GDP ratio rose to 356% in 2020, a new report from the Institute of International Finance finds. That is up 35 percentage points from where it stood in 2019, as countries saw their economies shrink and issued an ocean of debt to stay afloat.
Why it matters
The increase brings numerous countries, including the U.S., to extreme debt levels, well beyond what economists have called as unpayable in the past.
- Non-financial private sector debt alone now makes up 165% of the entire world’s economic output.
What they’re saying
“The upswing was well beyond the rise seen during the 2008 global financial crisis,” IIF economists said in the report.
- Back in 2008 and 2009, the increase in global debt ratio was limited to 10 percentage points and 15 percentage points, respectively.
By the numbers
Global debt increased to $281 trillion last year, with total private and public sector debt rising by $24 trillion in the 61 countries IIF follows.
- That rise accounts for more than a quarter of the $88 trillion increase in debt that has been accumulated over the past decade.
- Government debt accounts for 105% of global GDP, up from 88% in 2019, rising by $12 trillion in 2020 or nearly triple its $4.3 trillion increase in 2019.
- Debt in the financial sector rose by more than 5 percentage points to 86% of GDP in 2020. This was the largest increase since 2007 and the first annual increase since 2016.
Why the debt matters
While worries about significantly pushing up inflation and borrowing costs have not come to pass, slow growth and diminishing returns have, and the world’s already high debt levels look to be inhibiting economic growth and threaten to hold back a full recovery from the pandemic in the long run.
- Further, almost all of the debt issued in 2020 was to deal with present circumstances rather than to invest in forward-looking projects or growth, making future investments in such projects more difficult and potentially more costly.
Where it stands
The U.S. GDP growth over the next 10 years will be largely below 2% (with the notable exclusion of 2021), and that annual budget deficits will increase.
- The federal debt is set to exceed the size of the economy this year for only the second time since the end of World War II and grow to 107% of GDP by 2031.
- That projection was made without including the US president Biden’s proposed $1.9 trillion stimulus package.