ANALYSIS Some Rising Pressure Points in Global Debt January 2019 Introduction Prepared by Global leverage has been rising as a share of GDP over the past decade. This is a growing Steven G. Cochrane concern, as questions around sustainability loom large in some pockets. Also, although global [email protected] Chief APAC Economist financial conditions remain largely accommodative, debt servicing costs will continue rising over the next year after an extended period of low borrowing costs, putting pressure on Katrina Ell balance sheets. [email protected] Economist Marc Korobkin [email protected] Associate Economist Contact Us Email [email protected] U.S./Canada +1.866.275.3266 EMEA +44.20.7772.5454 (London) +420.224.222.929 (Prague) Asia/Pacific +852.3551.3077 All Others +1.610.235.5299 Web www.economy.com www.moodysanalytics.com MOODY’S ANALYTICS Some Rising Pressure Points in Global Debt BY STEVEN G. COCHRANE, KATRINA ELL AND MARC KOROBKIN lobal leverage has been rising as a share of GDP over the past decade. This is a growing concern, as questions around sustainability loom large in some pockets. Also, although global financial conditions G remain largely accommodative, debt servicing costs will continue rising over the next year after an extended period of low borrowing costs, putting pressure on balance sheets. Global trends China’s total nonfinancial debt has risen over household debt (see Chart 2). The move- As the global business cycle has advanced the past 10 years from 141% of GDP in 2008 ments in the U.S. and China went in opposite over the 10 years since the financial crisis, to 261% in the first quarter of 2018. It has directions; household debt as a share of GDP the global economy has accumulated a risen above the ranks of other emerging mar- fell 25 percentage points to 75% in the U.S. record amount of outstanding debt when kets to exceed that of the U.S. and match the from 2007 to early 2018, while it rose in Chi- measured as a percentage of gross domestic euro zone’s. na by just more than 25 percentage points product. Data from the Bank for Interna- Although China’s debt has marched in- to end at 50% of GDP. Further, the shifts in tional Settlements trace global debt back exorably upward since the 2008-2009 global both countries have largely been related to to 2001 (individual country data go back financial crisis, when central banks world- mortgage debt, as housing markets in China further), when total global nonfinancial sec- wide went on a lending spree to stimulate have boomed and those in the U.S. struggled tor debt amounted to 191% of global GDP. their economies and avoid recession, total under a severe price correction and subse- It rose quickly following the dot-com bust debt relative to GDP in the U.S. and the euro quently tight mortgage-lending standards. of 2001 as governments increased spend- zone already peaked over the course of the The pullback or lack of growth among the ing to avoid recession. It reached 210% of past decade. The debt-to-GDP ratio in the advanced economies has offset emerging- GDP as the global economy entered the U.S. peaked in 2011 as mortgage foreclosures market household debt to maintain a fairly financial crisis in 2007. Fiscal stimulus caused were resolved and lending patterns tight- flat global pattern over the past decade. debt to rise again through to 2013, and the ened. The euro zone’s ratio peaked in 2014 as Corporate debt is a different story. In subsequent slow pace of economic growth it struggled to rein in sovereign debt. Further, China, corporate debt has soared from just combined with historically low interest rates the pattern of debt growth has varied greatly less than 100% of GDP to nearly 165% in allowed total debt to continue to rise, reach- when comparing ing a record 246% of GDP by the first quarter debt issued to house- Chart 1: Debt Rises Across the Globe of 2018. holds, corporations Total nonfinancial sector debt, % of GDP This paper examines patterns of debt or government. 300 through time and across countries as well as Household debt across the household, corporate and govern- has tended to con- 250 ment sectors to determine where there have verge over the past 10 been significant changes and implications years in the advanced 200 for the economic outlook. This research will economies, including 150 examine the global pattern but will focus on the euro zone and World Emerging markets the Asian economies. the U.S., reducing ex- 100 Euro zone Advanced economies Debt has accumulated across the globe, posure to household China U.S. but regional patterns vary (see Chart 1). A debt, while China and 50 07 08 09 10 11 12 13 14 15 16 17 18Q1 higher proportion of the debt has accumu- other emerging mar- lated in China and other emerging markets. kets have expanded Sources: BIS, Moody’s Analytics Presentation Title, Date 1 2 JANUARY 2019 MOODY’S ANALYTICS Chart 2: Household Debt Converges Chart 3: Surge of Corporate Debt in China Total household debt, % of GDP Total nonfinancial corporate debt, % of GDP 100 200 World Emerging markets 175 Euro zone 75 Advanced economies 150 China U.S. 50 125 100 25 World Emerging Markets 75 Euro Zone Advanced Economies China U.S. 0 50 07 08 09 10 11 12 13 14 15 16 17 18Q1 07 08 09 10 11 12 13 14 15 16 17 18Q1 Sources: BIS, Moody’s Analytics Sources: BIS, Moody’s Analytics Presentation Title, Date 2 Presentation Title, Date 3 the first quarter of 2018 (see Chart 3). Only zone, but with a lag of about two years. In past five years. But Ireland, Spain and Den- in 2017 did this figure fall by more than China, a sharp stimulatory rise in debt in mark are among the countries where debt a rounding error as policymakers worked 2009 has been followed by a very slow but has fallen significantly over this period. The to rein in credit and begin a long-awaited steady gain. The gap between emerging- data for Ireland, however, overstate the im- deleveraging process. market government debt and that of the provement because of revisions to GDP that In the U.S., the corporate debt cycle advanced economies has actually widened raised its value by 25% in 2015 as several had followed the early years of the busi- over this time. large foreign firms switched their operating ness cycle, peaking in 2008 and then falling base to Ireland via acquisitions of small, lo- through 2011. But historically low interest Recent trends cally based firms. Following their change of rates encouraged an uptick in lending as the Developed economies generally can domicile, their operations were incorporated economic recovery gained traction, so that manage higher levels of debt relative to into the corporate sector of Irish GDP. So corporate debt peaked at 73.6% of GDP in GDP, with a cluster of them ranging between although exposure to debt has improved in 2017, which held steady through the first 200% and 300% (see Chart 5). These coun- Ireland, the BIS data overstate the case. But quarter of 2018. tries, mostly in Europe and North America, Spain, Denmark and Portugal have seen real Sovereign debt is the only component have better regulatory control, more trans- improvements in recent years, while Greece that has been rising slowly but steadily parent loan origination standards, and has not. across the world (see Chart 4). Government stronger portfolio management methods. Most emerging markets have much debt rose sharply in the U.S. and other ad- Levels of debt in a few of these countries, lower debt-to-GDP ratios than developed vanced economies through 2012 because of however, have risen rather quickly in recent economies. But in some cases, total debt has stimulatory monetary policy. But as auster- years. Norway, France, Canada and Austria risen quickly; Chile, Brazil, Turkey and Saudi ity replaced stimulus, the debt-to-GDP ratio have each had an increase greater than 20 Arabia are examples. Some of the greatest leveled off. The same was true in the euro percentage points as a share of GDP over the increases, however, have been in Asia. Hong Chart 4: Government Debt Edging Upward Chart 5: Total Nonfinancial Debt Total government debt, % of GDP Total debt-to-GDP ratio, % (x-axis), 5-yr change, ppts, (y-axis) 125 60 2017 CHN HKG 40 SGP SA CHL NOR LUX 100 AUS FRA 20 TUR CAN MEX ARG BRA CHE BEL MYS KOR GBR IDN RUS ZAF FIN USA JPN 75 0 IND THA SWE POL ISR ITA GRC DEU NZL AUT NLD -20 DNK CZE HUN 50 -40 ESP PRT World Emerging markets -60 25 Developed economies Euro zone Advanced economies -80 Emerging markets China U.S. IRE 0 -100 07 08 09 10 11 12 13 14 15 16 17 18Q1 0 50 100 150 200 250 300 350 400 450 Sources: BIS, Moody’s Analytics Sources: BIS, Moody’s Analytics Presentation Title, Date 4 Presentation Title, Date 5 3 JANUARY 2019 MOODY’S ANALYTICS Chart 6: Chinese Stimulus Drove a Rebound Chart 7: Varied Household Debt Patterns China real GDP, % change yr ago Household debt-to-GDP ratio, % (x-axis), 5-yr chg, ppts, (y-axis) 20 16 CHN NOR KO AUS LUX HKG R CHE 10 SWE 14 SAU MEX CHL FRABEL FIN CAN IND CZE NZL 0 IDN ISR JPN TH ARG RUS POL SGP GBR 12 TUR BRA ITA DE MY NLD ZAF AUT GBR DEN -10 HUN 10 GR -20 ESP PRT 8 2017 -30 Fiscal stimulus announced Nov 8, 2008 Developed economies 6 -40 IRE Emerging markets 4 -50 00 02 04 06 08 10 12 14 16 18 0 20 40 60 80 100 120 140 Sources: National Bureau of Statistics, Moody’s Analytics Sources: BIS, Moody’s Analytics (classifications according to MSCI Index) Presentation Title, Date 6 Presentation Title, Date 7 Kong joins China as countries with the fast- the financial crisis began to wane.