Global debt has risen $57tn or 17% of world GDP since 2007 and rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to economic output than they did in the year of the outbreak of the subprime mortgage crisis and the global credit crunch.
McKinsey Global Institute says in the third report in a series on debt and deleveraging, that expectations that the worst recessions since the Great Depression of the 1930s, would spur widespread “deleveraging” to safer levels of indebtedness were misplaced. The report calls for “fresh approaches” to preventing future debt crises.
OECD data show that real world GDP growth is up 121% since the end of 2007 and the 17% rise in debt since the crisis This is not compares with a 23-point increase in the seven years before the crisis.
China’s debt has quadrupled since 2007. Fueled by property and shadow banking, China’s total debt has nearly quadrupled, rising to $28tn by mid-2014, from $7tn in 2007. At 282% of GDP, China’s debt as a share of GDP, while manageable, is larger than that of the United States or Germany.
MGI says that as it appears, economies need ever-larger amounts of debt to grow, and deleveraging is rare and increasingly difficult, they may also need to learn to live more safely with high debt. That will require new approaches to manage and monitor it, to reduce the risk of crises, and to resolve private-sector defaults efficiently. Policy makers will need to consider more ways to reduce government debt, and it may be time to reevaluate how incentives in the tax system encourage the amassing of debt.
When there are signs of credit bubbles, regulators can seek to cool markets with countercyclical measures, such as tighter loan-to-value rules and higher capital requirements for banks. "Debt undoubtedly remains an essential tool for financing economic growth. But how it is created, used, monitored, and (when necessary) discharged still needs improvement."
Developing economies have accounted for 47% of all the growth in global debt since 2007—and three quarters of new debt in the household and corporate sectors. The MGI report says that to some extent, this reflects "healthy financial system deepening, as more households and companies gain access
to financial services. "Moreover, debt in developing countries remains relatively modest, averaging 121% of GDP, compared with 280% for advanced economies. There are exceptions, notably China, Malaysia, and Thailand, whose debt levels are now at the level of some advanced economies."
Only in the core crisis countries—Ireland, Spain, the United Kingdom, and the United States—have households deleveraged. In many others, household debt-to-income ratios have continued to rise. They exceed the peak levels in the crisis countries before 2008 in some cases, including such advanced economies as Australia, Canada, Denmark, Sweden, and the Netherlands, as well as Malaysia, South Korea, and Thailand.
Since 2007, government debt has grown by $25tn. It will continue to rise in many countries, given current economic fundamentals. Some of this debt, incurred with the encouragement of world leaders to finance bailouts and stimulus programs, stems from the crisis. Debt also rose as a result of the recession and the weak recovery.
Ireland: McKinsey not as sanguine as Noonan on debt sustainability
The report examines the evolution of debt across 47 countries—22 advanced and 25 developing—and assesses the implications of higher leverage in the global economy and in specific sectors and countries. The analysis, which follows our July 2011 report Debt and deleveraging: The global credit bubble and its economic consequences and our January 2012 report Debt and deleveraging: Uneven progress on the path to growth, focuses on the debt of the “real economy”: governments, nonfinancial corporations, and households. It finds that debt-to-GDP ratios have risen in all 22 advanced economies in the sample, by more than 50%age points in many cases.