The Institute of International Finance (IIF) reported on Tuesday that global debt reached an all-time high of $307 trillion in the second quarter, despite a decrease in bank credit due to increasing interest rates. The rise in debt was largely driven by countries like the United States and Japan.
The financial services organization stated in a document that worldwide debt in US dollars had increased by $10 trillion during the first half of 2023 and by $100 trillion in the last ten years.
According to the report, there has been a recent rise in the global debt-to-GDP ratio, reaching 336% for the second consecutive quarter. This increase is due to a decrease in growth and inflation, resulting in slower expansion of nominal GDP compared to the growth of debt levels.
At a news conference, Emre Tiftik, director of sustainability research at the IIF, stated that the ratio of debt to GDP has once again begun to increase.
This increase is significant as it follows seven quarters of decreasing debt ratios and is primarily due to the decrease in inflationary pressures.
The International Institute of Finance (IIF) reported that due to a decrease in wage and price pressures, although not meeting their goals, they anticipate the debt to output ratio to exceed 337% by the end of the year.
In the past few months, experts and government officials have expressed concerns about the increasing amount of debt. This can lead countries, businesses, and individuals to cut back on spending and investments, ultimately limiting growth and negatively impacting quality of life.
Over 80% of the recent development has originated from developed nations, including the US, Japan, Britain, and France which saw the most significant growth. In emerging markets, the most notable increases were seen in the largest economies such as China, India, and Brazil.
According to Todd Martinez, co-head of the Americas sovereign team at Fitch Ratings, there is currently a positive trend in emerging markets compared to developed markets. This statement was made during the release of the IIF report, sponsored by Fitch Ratings.
“Following the pandemic, developed markets are experiencing a slower recovery of their pre-crisis fiscal positions compared to emerging markets. Additionally, many of them were also impacted by the recent energy crisis caused by the conflict in Ukraine.”
The study discovered that the ratio of household debt-to-GDP in developing countries remains higher than before the COVID-19 pandemic, mainly driven by China, Korea, and Thailand. On the other hand, the same ratio in developed countries has decreased to its lowest point in twenty years during the first half of this year.
According to Tiftik, there is positive news indicating that the amount of debt carried by consumers is still under control. If there continues to be rising inflation, the financial stability of American households will serve as a buffer against potential increases in interest rates by the Federal Reserve.
According to the CME FedWatch tool, the current expectation is for the target rate to remain between 5.25% and 5.5% until at least May of next year, as markets are not factoring in a US Federal Reserve rate hike in the near future.
The United States is projected to maintain high interest rates for an extended period, potentially creating challenges for emerging markets as investors may choose to focus on more stable developed countries.
On Wednesday, the Federal Reserve is anticipated to maintain current interest rates, but may indicate a willingness to implement more rate increases.