Global debt-to-GDP ratio resumes upward trajectory after consistent decline in 2023

The ratio of global government debt to gross domestic product rose during the first quarter of the year after three consecutive quarters of decline last year, with falling inflation exposing high public spending across major economies. 

The Institute of International Finance this week reported that global debt increased by $1.3tn in the first quarter of 2024, hitting a record high of over $315tn. This is equivalent to 333 per cent of global GDP, up from 330 per cent in December. 

Global debt to GDP fell in 2023 largely as a result of high inflation boosting nominal GDP more than government debt, with the accumulation of said debt slowing partly due to inflation-boosted tax revenues more than public expenditure, according to Simon MacAdam, deputy chief global economist at Capital Economics.

“Now that global inflation has fallen so far (from 8 per cent in late 2022 to 3.5 per cent now), this inflation effect has run its course, [so] we are back to the underlying issue of poor public finances showing up in the debt ratio statistics,” MacAdam told The Banker. 

Government budget deficits remain higher than pre-pandemic levels and are set to contribute around $5.3tn to global debt accumulation this year, the IIF reported.

“Most [major advanced economies] are likely to find it hard to shrink their [primary budget deficits] due to the political backdrop, weak GDP growth, or the fiscal pressures from ageing populations and the green transition,” said MacAdam.

“This will exacerbate growing worries about fiscal sustainability, which will keep bond yields high, [which] could force countries into an abrupt fiscal consolidation or encourage them to use financial repression to push interest rates back down.” 

The IIF found emerging market debt “build-up” predominantly came from China, India and Mexico in the first quarter of 2024, while South Korea, Thailand and Brazil saw the most significant declines in the dollar value of their total debt. 

In mature markets, debt rose most quickly in the US and Japan, followed by Ireland and Canada. Increasing debt levels in China and the US reflect recent warnings from the IMF that public debt in the world’s two largest economies risks doubling by 2053.

The ongoing resilience of the US economy, boosted by the government running sizeable fiscal deficits, raises the risk that global financing conditions could remain relatively tight for an extended period, according to Henry Cook, head of macroeconomic research for Europe, the Middle East and Africa at MUFG.

“Outside of the US, developed economies mostly stagnated since pandemic-related rebound effects faded, but there have been encouraging signs of better global growth momentum in recent months,” he said.

Across mature markets, debt levels remained broadly stable in the first quarter of 2024, according to the IIF. “A reduction in debt by households and non-financial corporations offset the continued rise in government and financial sector indebtedness [...] the most significant declines were observed in Switzerland and Germany,” the IIF said in its monitor report.

It is now clear that the European economy has started the year on a much better footing, according to Cook.

“The ongoing recovery in real income growth points to this momentum being maintained over coming quarters — reducing any temptation there may have been to kickstart growth with additional fiscal stimulus,” he said.

“Overall, we expect that a period of gradual fiscal consolidation lies ahead for most developed economies.”

Developing countries’ government debt in particular could be further strained by “sticky” US inflation and an expected delay to Fed rate cuts, according to the IIF. 

“Structurally higher spending demands related to defence spending and the energy transition, and perhaps more active industrial policy, mean that the fiscal consolidation process from here will likely be gradual. Governments will be reluctant to significantly tighten the purse strings,” said Cook.

The IIF described this against the backdrop of rising trade frictions and deeper geo-economic fragmentation, which it said could diminish the external debt servicing capacity of emerging markets.