The world has never been as indebted as it is right now.
According to data released by the Institute of International Finance (IIF) earlier this year, global levels of debt held by households, governments, financials and non-financial corporates jumped by over $US70 trillion in the past decade to a record high of $US215 trillion, equating to 325% of global GDP.
$US216,000,000,000,000, or 325% of annual economic output globally.
At the turn of the last century that percentage stood at just 233%.
Given the rapid increase, it useful to see where and who has been accumulating the debt. It does, after all, have to be paid back at some point, bringing into question the creditworthiness of debtors.
That’s exactly what economists at the Commonwealth Bank have done, producing an excellent slide deck showing who’s been borrowing and who’s been deleveraging in recent years.
Here are just a few of the charts it’s supplied looking at the evolution of global debt levels during the 2000s, along with a brief explanation on each.
Total debt to GDP
“Global debt has been on a long-run upward trend relative to GDP,” says Blythe, noting that the trend was only briefly interrupted in the immediate aftermath of the global financial crisis of 2008 and 2009 when financials and households embarked on balance sheet repair.
Total debt to GDP by sector
Non-financial corporates currently hold the largest debt loading of any sector, taking advantage of low interest rates globally driven by ample levels of liquidity thanks to ultra-easy monetary policy from major central banks.
Government debt levels have also risen sharply, driven by policymakers’ attempts to spur on economic activity and bailouts of the financial sector. As a percentage of GDP, debt levels in the latter have fallen due to balance sheet repair in the wake of the global financial crisis.
The same can be said of households, although debt levels are now increasing again.
The percentage change in debt levels by sector
This reflects the changes in debt levels since the global financial crisis, with government debt levels increasing at double the pace of any other category.
The split in debt to GDP by developed and emerging economies
While debt levels in developed nations remain significantly higher than in emerging economies, the gap between the two is narrowing, thanks largely to increased indebtedness in China.
In absolute terms, debt levels in developed economies stood at $US160 trillion at the end of 2016, with that in emerging economies swelling to $US56 trillion.
The developed economies included in this figure include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, US and UK.
The emerging economies consist of Argentina, Brazil, Chile, China, Colombia, Czech Republic, Hong Kong, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Poland, Russia, Saudi Arabia, Singapore, South Africa, Thailand and Turkey.
Emerging market debt levels by sector
The IIF says growth in emerging market debt has been concentrated in non-financial corporate sector, where debt-to-GDP has risen from 68% in 2006 to 100% in 2016.
Most of it has occurred in China, as shown in the final chart below.
Emerging market non-financial sector debt levels by nation
The CBA says concerns related to China’s ballooning non-financial sector debt, driven by both private and publicly-owned firms, centres around poor quality lending to marginal borrowers and unprofitable projects, much of it originating from the nation’s shadow banking sector.
So there you have it.
Debt levels globally have increased rapidly over the past couple of decades, driven predominately by governments in the developed world and non-financial debt in emerging markets, especially in China.
Is the increased indebtedness a reason for concern, leading to the potential for a global debt crisis following those in the US and Europe beforehand, or is this debt loading manageable for the moment?
According to Michael Blythe, chief economist at the Commonwealth Bank, the risks for the moment are manageable.
“The traditional macroeconomic triggers such as rising unemployment and higher interest rates for a financial crisis are largely absent or contained,” he says.
“The global economy is slowly picking up rather than slowing as in 2008, and unemployment is falling as a result.
“And while the Fed is lifting US interest rates but policy rates elsewhere are low and market interest rates are contained.”
Blythe also says that increased levels of indebtedness have also seen “neutral” policy interest rate levels — those where they neither add to or curb economic activity — have also moved lower in recent years, limiting the level that interest rates can be increased.
It’s also worthwhile pointing out that asset prices have also increased alongside debt levels, although the growth in the former can largely be explained by that in the latter.
Debt is cheap and it’s been used to pump up asset prices.
That, says Blythe, is a risk given it may have altered the mindset of investors.
“One risk to watch is that extreme policy settings such as record low interest rates and record high liquidity have been in place for long enough that behaviour has changed,” he says.
“The focus has shifted towards the pursuit of yield and the pursuit of capital gain and balance sheets have taken on more risk.”
Alongside that risks, there’s also the impact on economic activity should debt levels continue on their current trajectory.
Debt servicing costs for governments, businesses and households have been limited by the sharp reduction in interest rates globally in the years since the global financial crisis, allowing for more debt to be accumulated.
Should debt levels increase further or interest rates rise, even modestly, servicing costs will increase sharply limiting the ability for consumption and investment, and with it creating a greater risk of a slowdown or worse in the economy.