Global Debt and Economy

The excessive amount of debt continues to affect the economy in 2020. This problem started a long time ago, but it far from being over for various reasons. Unfortunately, the situation is not improving. Moreover, by the end of September 2019, a global debt almost reached a record of $252 trillion.

According to the Institute of International Finance (IIF), the world’s debt reached another all-time high in the third quarter of 2019. IFF compared global debt against the total output. The results are not promising; debt was 322% higher than total production.

The new research report prepared by IIF shows that debt is set to keep growing, which is a serious challenge for the economy in general.

For example, in the second quarter of 2019, global debts stood at $250.9 trillion. In just one-quarter, debt increased by more than $2 trillion, more precisely $24 trillion. Moreover, IFF expects that global debt will surpass $257 trillion in the first quarter of 2020. The Institute of International Finance dates back to the 1980s when financial institutions came together during the debt crisis.

Based on the report, one of the primary factors why debt will continue to grow is connected with non-financial sector debt.

Low-interest rates in many countries around the world made it easier for the public as well as governmental organizations to borrow money. Consequently, the excessive amount of debt only continued to grow throughout the years.

The higher interest levels are dangerous for individuals, companies, and the government. The risk of default may further exacerbate the situation.

Indebted countries and economy

Let’s have a look at the countries with a significant amount of debts and how local economies are trying to cope with the issue.

This report identified countries with huge government debts. The United States and Australia reached all-time highs in the third quarter of 2019. Furthermore, debt growth remains a serious problem for China based on the results.

In 2017/2018, debt started to fell but the situation began to change in 2019. Last year debt accumulation reemerged in China, especially in the non-financial corporate sector.

Some economists are concerned regarding China’s borrowing rates. They believe that rates increased at an unsustainable pace. As a result, this may cause a financial problem for the country that has the second-largest economy in the world. Chinese corporate, as well as household debt, is not an easy topic. However, other people disagree, and they underlined one factor. Most of China’s debt is state-owned, and it will be possible to manage this debt.

Interestingly, China’s household and general government debt are the highest levels. Based on the information provided by the IFF, debt currently stands at 55% of the gross domestic product (GDP). It is only part of the problem as overall Chinese debt is close to 310% of GDP. It is important to mention that China has one of the highest amounts of debt in correlation with the GDP in emerging markets.

China is trying to change the old model, but it will take time to replace the model the country used for the last 25 years.