The world is still drowning in debt

published 13 February 2015

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.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Where the debt is piling up

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.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.