The global debt burden rose to $305 trillion in the first quarter of this year and is expected to grow further over the next five years.
As governments have diligently increased their debt burden, interest rates have increased and economies are growing at a slower rate. It raises questions about whether such debts will be able to be serviced in the future.
Visual Capitalist have put together an infographic that shows how the ratio of debt to the economy will continue to grow in the coming years. The data comes from the World Economic Outlook report of the International Monetary Fund (IMF).
After a long period of stable growth, total government debt to gross domestic product (GDP) rose to nearly 100 percent in 2020. Although this ratio has fallen in 2021-2022 after high inflation and rapid economic growth due to the coronavirus, it will start to grow rapidly again in the following years.
Government debt levels are projected to reach 99.5 percent of GDP by 2027. Below is the data that goes back to 2005 with predicted forecasts for the next five years (2023-2027) also included:
Due to the economic crises, the debt level was rising rapidly both in 2008 and 2020. Historically, debt-to-GDP levels have risen by 4-15 percent in the five years following a global economic depression.
The US debt level is projected to reach 134 percent of GDP by 2027. The sharp rise in interest rates also raises the cost of servicing the debt, with US government interest payments reaching $475 billion last year. The country is projected to pay $10.6 trillion in interest over the next ten years.
China’s debt level has also risen sharply and is projected to exceed 100 percent by 2026. This means that by 2027 the ratio of national debt to GDP will have quadrupled. This year alone, a record increase in national debt is expected.
What about debt levels in other countries?
Below are the forecasts for developed economies and developing economies. In the case of developed countries, the USA is excluded, in the case of developing countries, China is not taken into account.
With the exception of the US, the debt level of developed countries should generally decline relative to GDP. Debt levels in developing countries (with the exception of China) are also decreasing.
The debt burden of countries with lower incomes is lower, but their debt will also increase in the coming years. Despite this, there are 39 countries among them whose debt burden is causing problems – mainly due to rising interest rates.
Are high debt burdens sustainable?
The good news in the report is that 60 percent of countries will be able to keep their debt burdens below their 2020 peaks by 2027.
At the same time, several large major economies have already experienced problems. For example, China, Brazil, Japan and Turkey are groaning under a heavy debt burden. In the US, interest payments on the national debt have quickly risen to new records.
This is at a time when the population is ageing, economic growth is slowing and healthcare costs are rising. We see these trends in many advanced economies.
Countries that can keep their economic growth above real interest rates are better off. At the same time, inflation remains high, which pushes interest rates higher. This makes it increasingly difficult to service high debt burdens.
Tavex analyst Mait Kraun’s comment:
The increase in debt levels during the corona crisis was unprecedented, so it is understandable that in the following years, debt levels have been falling compared to the total volume of the economy. At this point, it must be realised that the main reason for this is inflation and the extremely fast economic growth resulting from money printing, and not the governments’ decision to start reducing the debt. It is also important to understand that the impact of interest rates on the ability to service debt is very large. Let’s look at US interest payments on the national debt. Although the US debt burden has fallen from 133.5% in 2020 (compared to GDP) to 122.2% this year, due to the rise in interest rates, servicing the debt has become more difficult. In the second quarter of this year, annualised interest payments rose in the US to almost 970 billion dollars, three years ago this figure was almost twice as low (520 billion).
It is only a matter of time before creditors realise that the current debt levels in many countries are completely unsustainable. Then even higher interest will be demanded on the debt, because the risks are perceived as higher. Although the required interest rate is greatly affected by inflation and, consequently, also real interest rates (inflation has been calculated from the interest rate), in the following years, the thoughts of whether the country will be able to service its debt in the long term will have an even greater impact on the minds of investors. It is clear that in the long term, countries can only get out of the current situation with money printing and inflation. This helps to reduce the amount of debt compared to the economy. However, all this comes at the expense of creditors and ordinary people who will pay it off in the end.
Presumably, the policy of central banks (and the manipulation of interest rates) will have less influence on the real interest rates formed in the market. Soon, it will no longer be believed that the central bank’s base interest rate is fair. Therefore, the markets will take more interest rate shaping into their own hands.