“1Q22 Global debt dynamics – part 1”

The key chart

The key message

With global debt levels at a new, record high of $230 trillion and questions regarding debt sustainability dominating headlines, there are three key risks associated with popular investment narratives. The first is to treat the level of debt and the level of indebtedness synonymously. The second is to ignore the key structural shifts in global debt that have taken place since the GFC. The third is to dismiss the considerable differences that exist between the breakdown and level of indebtedness at the country level. The final risk is compounded by the fact that conventional macroeconomics typically ignores private sector debt while seeing public debt as a problem.  

Debt versus indebtedness

While the level of total debt is at a new high, the level of indebtedness (261% GDP) is 30ppt below its 4Q20 peak (291% GDP). Similarly at the country level, the US and China collectively account for just over half of outstanding global debt but neither rank among the top-ten most indebted global economies. In contrast, Japan and France both rank among the top-five global economies in terms of their share of total debt and their level of indebtedness – yet, how often is France included in debates over debt sustainability?

Structural shifts

The first important structural shift in the post GFC period is the one away from relatively high-risk household (HH) debt towards lower-risk government debt driven largely by US and UK debt dynamics. The second is the “apparent” shift towards EM debt. In reality, this is a China-debt story rather than an EM debt story, however. EM ex-China’s share of global debt is largely unchanged since the GFC.

Country-level differences

Finally, considerable differences exist between the breakdown and levels of global debt ratios at the country level. Six of the 43 BIS reporting nations have above average private and public sector debt ratios – Japan, Singapore, France, Canada, Belgium and Portugal. A further 14 reporting nations have above average private sector debt ratios but below average public sector debt ratios – Hong Kong, Luxembourg, Sweden, Switzerland, the Netherlands, Denmark, Norway, South Korea, China, Ireland, Australian, Finland, Thailand, and New Zealand.

The key point here is that conventional macroeconomics typically ignores private debt while seeing public sector debt as a problem.

Note in this context, the emphasis that is typically placed on debt sustainability in the US, UK, and Italy despite the fact that these three nations are among the six reporting nations that exhibit above average levels of public debt but below average levels of private sector debt.

As noted previously, the US, Italy and Germany are also the only three advanced economies that have both household and corporate debt ratios below the levels that the BIS consider detrimental to future growth. A topic that I will return to in subsequent posts on private sector debt dynamics.

1Q22 Global debt dynamics – the charts that matter

Debt versus indebtedness

The outstanding stock of global debt hit a new, record high of $230 trillion at the end of 1Q22, according the latest BIS statistics (see chart above). The level of global indebtedness, expressed as the level of debt to GDP, has fallen from its 4Q20 peak of 291% GDP to 261% GDP, however.

Note that the level of debt and the level of indebtedness are not synonymous.

The US and China collectively account for over half of global debt but neither economy ranks among the top-ten most indebted global economies. At the end of 1Q22, the US and China accounted for 28% and 23% of the outstanding stock of global debt respectively (see chart above). In terms of indebtedness, the US and China rank only #16 and #13 globally, however (see chart below).

In contrast, Japan and France both rank among the top-five global economies in terms of their share of total debt (see chart above) and their level of indebtedness (see chart below) – yet, how often is France included in debates over debt sustainability?

Structural shifts

The first important structural shift in the post GFC period is the one away from relatively high-risk HH debt towards lower-risk government debt driven largely by US and UK debt dynamics. At the end of 1Q08, corporate (NFC), HH and government debt accounted for 38.7%, 31.5% and 29.9% of total debt respectively. At the end of 1Q21, these respective market shares were 38.7%, 24.9% and 36.5%. In other words, while the share of NFC corporate data remains unchanged there has been a clear shift away from HH to government debt.

As highlighted in “Challenging flawed narratives” earlier this month, the structure of US debt is now the mirror image of its pre—GFC structure. This follows the shift away from HH debt towards government debt and the passive deleveraging of the US HH sector (see charts below repeated from previous post).

The second is the “apparent” shift towards EM debt. At the end of 1Q08, advanced economies and emerging markets accounted for 84% and 16% of outstanding global debt respectively. At the end of 1Q22, these respective shares had changed to 64% and 36% (see graph below).

In reality, this is a China-debt story rather than an EM debt story, however. EM ex-China’s share of global debt is largely unchanged since the GFC. In contrast, China’s share of total global debt has increased from 5% at the end of 1Q08 to 23% at the end of 1Q21 (see chart below and “Global debt dynamics – V“)

Country-level differences

Finally, considerable differences exist between the breakdown and levels of global debt ratios at the country level (see chart below). Six of the 43 BIS reporting nations have above average private and public sector debt ratios – Japan, Singapore, France, Canada, Belgium and Portugal (the top RH quadrant). A further 14 reporting nations have above average private sector debt ratios but below average public sector debt ratios – Hong Kong, Luxembourg, Sweden, Switzerland, the Netherlands, Denmark, Norway, South Korea, China, Ireland, Australian, Finland, Thailand, and New Zealand (the top LH quadrant).

The key point here is that conventional macroeconomics typically ignores private debt while seeing public sector debt as a problem.

Note in this context, the emphasis that is typically placed on debt sustainability in the US, UK, and Italy despite the fact that these three nations are among the six reporting nations that exhibit above average levels of public debt but below average levels of private sector debt (the bottom RH quadrant above).

As noted previously, the US, Italy and Germany are also the only three advanced economies that have both household and corporate debt ratios below the levels that the BIS consider detrimental to future growth. A topic that I will return to in subsequent posts on private sector debt dynamics.

Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.