With vaccines slowly being approved in various countries, the world may finally be on track to defeat the COVID-19 pandemic.

The economic situation, on the other hand, is not expected to improve anytime soon. Falling incomes combined with costly pandemic relief measures have increased global debt by $ 20 trillion since the third quarter of 2019. By the end of 2020, economists expect global debt to reach $ 277 trillion, or 365% of global GDP.

Today’s chart uses data from the Institute of International Finance (IIF) to provide an overview of where debt, relative to GDP, has increased the most.

Comparison of developed and emerging markets

Developed economies represent four of the five countries with the largest increases in debt to GDP, but more macroeconomic analysis reveals that debt levels are increasing at a similar rate around the world.

Q3 2019 (billions of dollars) Q3 2020 (billions of dollars) % Increase
Developed markets $ 181.8 $ 196.3 8.0%
Emerging Markets $ 70.9 $ 76.4 7.7%
Global total $ 252.7 $ 272.7 7.9%

Source: IIF, BIS, IMF, Haver, national sources

To put these figures into perspective, economists often use the debt / GDP metric, which compares a country’s debt to its economic output. As the name suggests, it is calculated by taking a country’s total debts and dividing them by its annual GDP. A low debt-to-GDP ratio suggests that a country will have little difficulty in repaying its debts, while a high ratio can be interpreted as a sign of a higher risk of default.

The actual definition of a “low” or “high” ratio is rather vague, although the world Bank believes that there is a threshold for public debt at 77% of GDP. Each percentage point above this threshold was found to reduce 0.017 percentage points of annual growth.

Comparison of debt to GDP by sector

To see how COVID-19 has affected the global economy since Q3 2019, let’s take a look at each industry’s debt as a percentage of GDP.

Households (T3 ’19) Households (T3 ’20) Non-financial * (Q3 ’19) Non-financial * (Q3 ’20) Government (Q3 ’19) Government (Q3 ’20)
Average of developed markets 72% 78% 91% 102% 110% 131%
we 74% 81% 75% 88% 102% 127%
Eurozone 58% 61% 108% 114% 102% 115%
UK 84% 88% 73% 78% 110% 130%
Emerging markets average 40% 44% 93% 104% 53% 60%
China 54% 60% 150% 166% 53% 63%
Russia 19% 23% 78% 91% 15% 18%
Global total 60% 65% 92% 103% 89% 105%

* Companies that are not part of the financial sector.
Source: IIF, BRI, Haver, national sources

In developed markets, the public debt-to-GDP ratio increased by 21 percentage points compared to 11 for non-financial companies, and 6 for households. This is not surprising since governments have provided billions (or in some cases trillions) of economic stimuli while extracting less tax revenue.

The story of emerging markets is slightly different, with non-financial companies registering the largest increase 11 percentage points. The sector’s debt is now at 104% of GDP, making it the most profitable in the region.

Highlights of today’s chart

Today’s chart summarizes this data at the country level, allowing us to identify two outliers: Canada and Australia.

Excluding the financial sector, Canada’s debt-to-GDP ratio increased by almost 80%, the highest of all developed countries. Government borrowing increased as the Canadian Emergency Response Benefit (CERB), which enabled struggling Canadians to $ 1,500 a month, called a bill of 60 billion dollars over 7 months.

Rising debt was not the only reason for the country’s worsening debt-to-GDP ratios. In the second quarter of 2020, Canada’s GDP declined at an annualized rate of 38%, its worst three-month performance on record.

Australia was another outlier, but for a different reason; the country’s household debt fell by almost 5% relative to GDP. This was probably due to a early access program which has enabled millions of Australians to withdraw from their Superannuation, a social security fund similar to America’s 401 (k).

We know that nearly 60% of those who access their [superannuation] early on used it … to meet essential daily expenses, including debt repayment.

—Josh Frydenberg, Treasurer of the Commonwealth of Australia

Officials have been cautious about prolonged use of these programs, as superannuation funds are meant to help people retire. Of 2.6 million Australians who retired early, 500,000 would have completely emptied their accounts.

Debt-to-GDP ratio should drop … Or is it?

A global rollout of COVID-19 vaccines is likely to end the ongoing health crisis and allow the economy to return to pre-pandemic levels, although delays are to be expected.

Either way, this is good news for governments and financial institutions around the world: economic output will pick up, lowering debt-to-GDP ratios. However, it is much more difficult to predict whether or not borrowing will slow down.

Government borrowing has been used to stimulate growth since 2008, and with 75% Americans in favor of a second COVID-19 relief bill, public debt is likely to accumulate further. Private sector debt follows a similar trend, US non-financial corporations $ 10.9 trillion in Q2 2020, from $ 6.4 trillion early 2008.

These growing debts have been manageable thanks to a prolonged period of low interest rates and loose monetary policy, but it remains to be seen whether this is sustainable or not.

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