The world is still drowning in debt

Almost eight years after the credit crunch began, the world’s debt pile is higher than ever – but don't count on us making much of a dent in it.

You might think that the global economy would have worked off some debt a few years after a debt crisis. But you'd be wrong. Almost eight years after the credit crunch began, the world's debt pile is higher than ever and odds are we won't make much of a dent in it over the next few years. High debt levels undermine growth and make households and governments more vulnerable to financial crises. So little has changed since 2007.

Between the end of 2007 and July 2014, the world added $57trn to its borrowings, according to McKinsey Global Institute. The consultancy has totted up public, household, financial sector, and corporate debt (for companies outside the financial sector). Overall, debt is now $199trn, or 286% of global GDP. That's up from 269% in 2007.

"Some of the growth in global debt is benign or even desirable," says McKinsey. For example, developing economies accounted for almost half the increase. This is partly a reflection of financial markets evolving and more households and firms gaining access to credit. If you strip out the borrowings of banks and other financial institutions, then overall emerging-market debt comes to 121% of GDP "relatively modest" compared to the 280% seen in advanced economies. Malaysia, Thailand and China are notable exceptions.

Where the debt is piling up

729-debt-chart

The scant progress is partly due to many households continuing to borrow and spend. In America and Ireland, household borrowing rose by more than a third in the run-up to the crisis. Since then, consumers in both states have cut back, as have those in the UK and Spain. But in France, South Korea, Sweden and Australia, the debt-to-income ratio has climbed by 10%-19% since 2007. In Canada it is 22% higher. Denmark has the highest debt-to-income ratio, at 269%. This is largely down to rising mortgage debt, as rising house prices encourage borrowing and spending.

Who's vulnerable?

The key to reducing debt of all kinds is economic growth, but this is getting harder and harder to come by. Workforces are shrinking in most developed countries. Everyone is trying to cut back at the same time, so it's hard to secure an advantage by weakening your currency to boost exports. Global growth is soggy, so inflation, which erodes the real value of debt, is low. And how will fragile, debt-soaked Western economies cope with higher interest rates or a new financial crisis? It's clear that we are still firmly in the grip of the post-bubble hangover.

Recommended

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?
Emerging markets

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?

Twenty years ago hopes were high for Brazil, Russia, India and China – the “Brics” emerging-market economies. But only China has beaten expectations. …
18 Oct 2021
The after effects of the gas-price shock
Economy

The after effects of the gas-price shock

In the wake of the recent spike in the natural gas price, we can expect slower growth, an industrial recession – and a newly assertive Russia, says Ma…
17 Oct 2021
The charts that matter: bond yields slip while bitcoin tops $60,000
Economy

The charts that matter: bond yields slip while bitcoin tops $60,000

Cryptocurrency bitcoin soared to over $60,000 this week, while government bond yields fell back. Here’s how that has affected the charts that matter m…
16 Oct 2021
Whistleblower allegations – where now for Facebook?
Tech stocks

Whistleblower allegations – where now for Facebook?

Facebook has come in for some fierce criticism after revelations from a former employee. Just how much damage has been done?
16 Oct 2021

Most Popular

How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
How to invest in SMRs – the future of green energy
Energy

How to invest in SMRs – the future of green energy

The UK’s electricity supply needs to be more robust for days when the wind doesn’t blow. We need nuclear power, says Dominic Frisby. And the future of…
6 Oct 2021
Why the world’s most important economic data release has unnerved markets
US Economy

Why the world’s most important economic data release has unnerved markets

The US added only 194,000 jobs in September, far shorter than the 500,000 that were expected. John Stepek explains why markets didn't react as they no…
11 Oct 2021