According to a McKinsey study, not only has government debt continued to rise, but so have household and corporate debt in many countries.
Global debt has soared by $57 trillion since the outbreak of the financial crisis in 2007 to reach $199 trillion at the end of 2014. Debt to GDP ratio increased from 269% to 286%, raising questions about financial stability and the potential threat of another crisis.
Research by consultants McKinsey in 47 countries report that:
“After the 2008 financial crisis and the longest and deepest global recession since World War II, it was widely expected that the world’s economies would deleverage. It has not happened. Instead, debt continues to grow in nearly all countries, in both absolute terms and relative to GDP. This creates fresh risks in some countries and limits growth prospects in many,”
“Higher levels of debt pose questions about financial stability and whether some countries face the risk of a crisis.”
“We conclude that, absent additional steps and new approaches, business leaders should expect that debt will be a drag on GDP growth and continue to create volatility and fragility in financial markets,”
China’s debt is rising rapidly. Fueled by real estate and shadow banking, China’s total debt
quadrupled from $7 trillion in 2007 to $28 trillion by mid-2014 which represents 282% of GDP.
It is clear that deleveraging is rare and that solutions are in short supply. Deleveraging is confined to a few sectors in some countries such as Argentina, Romania, Egypt, Saudi Arabia and Israel which managed to cut their debt.
Geographically, Ireland debt to GDP ratio increase 172%, Japan 64% and remains the world’s highest at 400%. China’s total debt, as a percentage of GDP, now exceeds that of the United States.
One piece of good news: the financial sector has deleveraged, and the most damaging elements of shadow banking in the crisis are declining. Shadow banking has retreated but non‑bank credit remains important
For corporations, non‑bank sources account for nearly all new credit growth since 2008. These intermediaries can help fill the gap as bank lending remains constrained in the new regulatory environment.
Households borrow more. In the four “core” crisis countries that were hit hard—the United
States, the United Kingdom, Spain, and Ireland—households have deleveraged. But in many
other countries, household debt-to-income ratios have continued to grow, and in some cases
far exceed the peak levels in the crisis countries
Source: McKinsey Global Institute