Quick Bite – Global Debt is Too High
In our previous Quick Bite, we noted that investors “should not fight the Fed” – meaning that when the Fed is in a rate-cutting cycle, share markets usually rise. But we also concluded that markets are inherently unpredictable, and that there are serious risks out there, one of which is the high level of global debt.
Source: IMF
While global debt has stabilized after the pandemic surge, it remains at an elevated level. Total global debt was 235% of global gross domestic product, according to the latest update of the IMF’s Global Debt Database.
Private debt declined to 143% of GDP, the lowest level since 2015, reflecting a reduction in household liabilities and little change in non-financial corporate debt. In contrast, public debt rose to nearly 93%, according to the IMF, reflecting an annual survey of the amount and composition of debt held by governments, businesses, and households.
In US dollar terms, total debt increased to $251 trillion, with public debt rising to $99 trillion and private debt decreasing to $152 trillion.
Diverging trends across income groups
These global averages mask differences across countries and income groups. While the US and China continue to play the dominant role in shaping global debt dynamics, debt and deficit levels in many countries are still high and concerning by historical standards, in both advanced and emerging economies.
In the US, general government debt last year rose to 121% of GDP (from 119%), while China saw an increase to 88% (from 82%). Excluding the US, public debt in advanced economies fell to 110% of GDP. Increases in some large, advanced economies like France and the UK were offset by declines in Japan and smaller economies, such as Greece and Portugal.
Excluding China, public debt in emerging markets and developing economies edged down to under 56% on average.
Investment implications of high levels of global debt
High sovereign indebtedness changes the investment landscape by altering expected returns, risk premia and policy optionality. Large public debt raises the supply of sovereign bonds and, all else being equal, places upward pressure on long term rates as markets demand compensation for higher fiscal risk. That effect is magnified where fiscal credibility weakens or where financing is concentrated in short maturities.
The dominant outcome for many advanced economies over the past few years has been higher long-run public debt and an upward repricing of interest rates.
What drives public and private debt patterns?
The persistently high global fiscal deficit, averaging around 5% of GDP, is the main driver of rising public debt. This deficit still reflects legacy costs from Covid-19 (such as subsidies and social benefits) combined with rising net interest costs.
The decline in private debt stems from different factors depending on the country and income group. In many advanced economies, companies are borrowing less, likely in response to subdued growth prospects and policy uncertainty, continuing a trend started in 2023. In the US, strong balance sheet positions and cash holdings are also contributing to lower corporate borrowing. In other cases, rising public debt alongside falling private debt suggests a crowding-out effect, in which heavy public borrowing limits credit availability or raises its cost for the private sector.
10 Year Treasuries over Last 5 Years
Source: Trading Economics
Implications for equities, real assets
Higher sovereign debt increases the probability of tighter fiscal policy over time (more taxes, government spending restraint) which lowers growth and discounts equity cash flows – pressuring valuations, particularly for long-duration growth names. At the same time, if inflation risks rise, real assets (commodities, infrastructure, real estate, gold) become relatively attractive hedges. In such an environment, investors are rewarded for favouring cash-flow resilient sectors.
High debt raises the chance of fiscal–monetary interaction that can limit central bank freedom to fight inflation without causing sovereign stress, and thereby elevating unforeseen risks.
Source: IMF
Australia in context
Australia’s public debt metrics are lower than most large advanced economies and projected to remain moderate in the medium term as per the Budget. That relative fiscal headroom supports Australia’s credit standing versus higher-debt peers, but risks remain from the highly leveraged private sector, where individuals under the spell of “ever-rising” house prices are concerning. And of course, cyclical revenue swings (largely due to commodity prices) and state-level exposures (let’s not talk about Victoria) require active monitoring.
Source: Trading Economics
The bottom line is that elevated public debt tends to raise interest rates, limit policy options and boost the value of inflation and real-asset hedges, and makes ongoing portfolio monitoring necessary.