According to the Institute of International Finance, markets like the United States and Japan were the main drivers of the growth in global debt, which reached a record $307 trillion in the second quarter of the year despite rising interest rates restricting bank credit.
The amount of global debt in dollars increased by $10 trillion in the first half of 2023 and by $100 trillion over the previous ten years, according to research by the trade association for financial services.
It claimed that the most recent increase has increased the global debt-to-GDP ratio to 336% for the second consecutive quarter. The debt ratio had been decreasing up to 2023 for seven quarters.
The study found that slower growth in conjunction with a slowdown in price increases were the main factors contributing to the increase in the debt ratio.
The IIF stated that “the sudden rise in inflation was the main factor behind the sharp decline in debt ratio over the past two years,” and that they anticipate the debt to production ratio to reach 337% by year’s end due to wage and price pressures lessening, even if not to their objectives.
With the United States, Japan, Britain, and France seeing the greatest rises, the developed world accounted for more than 80% of the most recent debt accumulation. The highest increases in developing markets were seen in the world’s three biggest economies: 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.
According to the analysis, China, Korea, and Thailand are mostly to blame for the fact that household debt-to-GDP in developing countries is still higher than it was before COVID-19. However, in the first half of the year, the same percentage in mature markets fell to its lowest point in twenty years.
“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.
The target rate of between 5.25% and 5.5% is now anticipated to stay in place until at least May of next year, according to the CME FedWatch tool, although markets are not currently pricing in a rate increase by the U.S. Federal Reserve in the near future.
Rates in the United States are anticipated to stay high for a considerable amount of time, which might put pressure on developing countries as necessary investment is directed to the less-risky developed world.
At the conclusion of its meeting on Wednesday, the Fed is expected to hold rates steady but may hint that it is open to more rate increases.
