The Institute of International Finance (IIF) has recently released a report in which it has been found that in the second annual quarter of this year, the global debt has increased to a worrisome record high level. The rise has also contributed to a decrease in the global debt-to-GDP ratio, which had been rising for the past seven annual quarters and is now anticipated to get to 337% by the end of this year.
With roughly 400 members hailing from more than 60 nations, the Institute of International Finance is the world’s largest association for the financial sector. Its goal is to assist the financial sector in managing risks responsibly, to create positive practices for the sector, and to promote financial economic and regulatory policies that promote both sustainable economic growth as well as global financial stability.
As global debt spikes to $307 trillion, the report has indicated all the major markets and commercial sectors that can be held responsible for this recent increment in global debt. It has also stated that the slow, delayed inflation and economic growth have contributed towards increasing the debt ratio.
A Grim Picture Painted
IMF noted last Tuesday that the growth of global debt over the previous ten years has been ‘staggering’ at a whopping $100 trillion – fuelling difficulties as global debt spikes to $307 trillion in the background. According to Reuters and Bloomberg, who cited the aforementioned research by the IIF, global debt reached a record $307 trillion in Q2 2023, increasing by $10 trillion in the first half of the year despite the higher interest rates that have been restricting bank loans.
As a percentage of the global gross domestic product (GGDP), debt has also started to rise again, rising to a gargantuan 337% by the end of this year from 334% by the end of 2022. The research authors noted that the quick surge in inflation was the primary cause of the sharp decrease in the debt ratio during the previous two years and explained that the ratio rise, which was attributable to large budget deficits, slower growth, and the decelerating market price hikes, came after almost two years of skyrocketing prices.
Why All Should Be Concerned?
The IIF added that the domestic debt strains are most definitely to balloon as “higher rates and higher debt levels” impel even greater interest expenditures by the various national governments. Furthermore, investment in emergent economies and developing markets will likely be constrained by the long-term projection of high interest rates in the United States.
The industrialized economies, which are responsible for almost 80% of the increase in global debt this year, have seen the biggest increases – all the more exacerbating the situation after global debt spikes to $307 trillion. These countries include the United States, whose federal debt has reportedly reached $33 trillion, Japan, the United Kingdom, and France. In particular, China, India, and Brazil, the greatest rising economies, have seen enhancements.
Even though the global debt spikes to $307 trillion, the IIF has optimistically noted that household debt in advanced nations is at its lowest level in two decades. This fact comes across as a relief to everybody in the face of the otherwise anxiety-inducing international circumstances.
The strength of household balance sheets, especially within the United States of America, would be able to provide a protective buffer for shock absorption, extenuating against any further hikes in the global rate of debt – if inflationary pressures keep lingering in the developed economies. Rates in the United States are anticipated to stay high for a considerable amount of time, which might put pressure on emerging countries as necessary investment is directed to the developed world, which is less likely to be adversely affected.
The target rate range of 5.25% to 5.5% is now anticipated to stay in effect until at least May of next year, according to the CME FedWatch tool, but markets are not currently pricing in a rate increase by the U.S. Federal Reserve.