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

The Arab Spring ten years on: a revolution that failed to blossom
Global Economy

The Arab Spring ten years on: a revolution that failed to blossom

Ten years ago, the Arab world was rocked by mass protests and popular uprisings that ousted long-reviled dictators. For the most part, the end result …
23 Jan 2021
The charts that matter: inflation, bubbles, and booze
Economy

The charts that matter: inflation, bubbles, and booze

As US stocks head higher into bubble territory, John Stepek looks at the charts that matter most to the global economy.
23 Jan 2021
Inflation is the easiest way out of this – just don’t expect politicians to admit it
Inflation

Inflation is the easiest way out of this – just don’t expect politicians to admit it

The UK government borrowed £34.1bn in December, a record amount for that month. Britain's debt pile now amounts to 100% of GDP. How are we going to pa…
22 Jan 2021
Beware: inflation is starting to stir in the US
Inflation

Beware: inflation is starting to stir in the US

With US consumer prices up by 1.4% in the last year, concern about inflation is now everywhere.
22 Jan 2021

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
The world’s fund managers are getting very bullish – be careful out there
Stockmarkets

The world’s fund managers are getting very bullish – be careful out there

The latest survey of fund managers shows them to be extremely bullish on all the same things. And that, says John Stepek, means the market is in dange…
21 Jan 2021
Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021