Global private debt drops

According to an International Monetary Fund blog post jointly authored by Vitor Gaspar, Carlos Goncalves and Marcos Poplawski-Ribeiro, global private debt fell by 2.8 percentage points to 143 percent of GDP, below the 2019 level. It more than offset the increase in public debt.

According to the latest IMF Fiscal Monitor, global public debt is high, rising and risky.

According to the three IMF analysts, empirical analysis points to low growth prospects as the main driver of the fall in private debt in 2023. They point out that the way households and businesses react to current and expected future growth is very important for private debt. Given weak growth prospects, many firms and households are opting to pay down debt. The fall in private debt slowed compared to 2022 mainly because of a reduction in the contribution from unexpected inflation to debt erosion.

This observation of low private debt has similarly been cited by Philippine analysts who have stressed the need for local private consumption (both by households and businesses) to pick up for the Philippine economy to resume growth next year and beyond.

The IMF analysts noted that unexpected inflation was a major factor in 2021 and 2022. Since debt is fixed in nominal terms, unexpected inflation can actually erode the real value of debt and lower its ratio to GDP. In 2022, inflation reached levels unprecedented since the Great Inflation of the 1970s and early 1980s.

They pointed out that a simple way to visualize the relationship between private debt, growth and growth prospects is to look at the elasticity of private debt to the difference between growth prospects and current growth. Global private debt corresponded to more than $150 trillion in 2023. As a share of GDP, it fell by 2.8 percentage points to 143 percent of GDP, returning to its 2019 level. Global household and non-financial corporate debt declined to 54 and 90 percent of GDP, respectively.

Private debt declined across both advanced economies and low-income developing countries and remained steady in emerging market economies (excluding China). Private debt fell sharply in the United States by six percentage points of GDP, while it soared in China by 6.5 percentage points of GDP in 2023.

Global public debt rose to $98 trillion in the same year. As a share of GDP, it has resumed a rising trend, inching up by two percentage points to 94 percent of GDP. On average, the public debt-to-GDP ratio increased in emerging markets and developing economies, while it fell in advanced economies (excluding the US).

As economic prospects brighten compared to the current situation, households and firms are more inclined to resort to debt financing. In recent years, deteriorating growth prospects have made this logic operate in reverse.

Addressing private and public debt risks

Although declining, in 2023, non-financial corporate and household global debt remains elevated at more than $150 trillion.

Financial stability risks and policies to mitigate and manage them are comprehensively covered in the Global Financial Stability Report.

In its GFS Report, the IMF noted that “with the expectation that monetary policy will continue to ease globally, financial conditions have remained accommodative, emerging markets have remained resilient and asset price volatility has stayed low on net. However, accommodative financial conditions that keep near-term risks contained also facilitate the buildup of vulnerabilities, such as lofty asset valuations, the global rise in private and government debt and increased use of leverage by non-bank financial institutions. These vulnerabilities could worsen future downside risks by amplifying adverse shocks, which have become more probable due to the widening disconnect between elevated economic uncertainty and low financial volatility. Furthermore, access to funding for economies with weaker fiscal buffers may become more constrained, and the slowing growth outlook in China, along with fragilities in its financial system, is a key downside risk to the global economy. Pressures on the commercial real estate sector also continue to be acute, and some midsized companies’ borrowings are becoming increasingly strained. These mounting vulnerabilities highlight the urgency for policymakers to address them.”

Additionally, the IMF GFS Report cited that “uncertainty regarding global economic outcomes and policies has been higher since the COVID-19 pandemic amid inflation shocks, rising geopolitical tensions, emerging technologies and climate-related disasters.”

The IMF noted the implications of high macroeconomic uncertainty for macrofinancial stability by studying its association with downside tail risks to future output growth, asset prices, and bank lending growth. The findings show that high macroeconomic uncertainty can significantly raise downside risks for economic and financial stability, and the relationship may be stronger when macrofinancial vulnerabilities are elevated, or financial market volatility is low (during episodes of a macro-market disconnect). Moreover, macroeconomic uncertainty can trigger cross-border spillover effects through trade and financial linkages. More credible policy frameworks and building resilience through adequate macroprudential policies and reserve buffers and by reducing fiscal vulnerabilities, could help mitigate the adverse consequences of high macroeconomic uncertainty.

The IMF blog post warns that the role of deteriorating growth prospects in the decline of private debt is a reminder of the unfortunate combination of high debt and low growth that heightens the challenge of balancing the fiscal equation. Chapter 3 of the recent World Economic Outlook emphasizes that structural policies are crucial to deliver sustainable and inclusive growth.

The latest IMF Fiscal Monitor argues that, in most countries, additional efforts are necessary now to contain public finance risks with a high degree of confidence. But it also argues that fiscal policy has a central role – for example, through public investment and policies that support innovation and research – among the structural policies that must be deployed to deliver enduring, sustained and inclusive growth.