The Institute of International Finance (IIF) said on Tuesday that global debt reached a record $307 trillion in the second quarter of the year, despite rising interest rates restricting bank credit, with markets such as the United States and Japan driving the increase. According to research by the financial services trade association, worldwide debt in monetary terms increased by $10 trillion in the first half of 2023 and by $100 trillion over the previous decade. According to the report, the recent increase has increased the global debt-to-GDP ratio to 336% for the second quarter in a row. Prior to 2023, the debt ratio had been falling for seven consecutive quarters.
Slower growth, combined with a slowing in price increases, was cited as the cause of the debt ratio increase, according to the research. “The sudden rise in inflation was the main factor behind the sharp decline in debt ratio over the past two years,” the IIF said, adding that with wage and price pressures moderating, even if not to their targets, they expect the debt to output ratio to surpass 337% by year-end.
More than 80% of the latest debt build-up had come from the developed world with the U.S., Japan, Britain, and France posting the highest rises. Among emerging markets, the strongest rises came from the largest economies, particularly China, India, and Brazil. “As higher rates and higher debt levels push government interest expenses higher, domestic debt strains are set to increase,” the IIF said.
Household debt in mature markets at lowest level in two decades
According to the research, household debt-to-GDP in emerging markets is still higher than it was before COVID-19, owing mostly to China, Korea, and Thailand. However, in mature markets, the same percentage fell to its lowest level in two decades in the first six months of the year. “Should inflationary pressures persist in mature markets, the health of household balance sheets, particularly in the U.S., would provide a cushion..against further rate hikes,” it said.
Markets are not pricing in a rate hike by the United States Federal Reserve in the near future, but the current target rate of between 5.25% and 5.5% is projected to remain in place until at least May of next year, according to the CME FedWatch tool. The Fed is anticipated to hold interest rates unchanged at the end of its meeting on Wednesday, but it may suggest that it is willing to boost rates further.