Tough days ahead
With uncertainty claiming its grip on the world markets, the global debt has once again shown an increase and it has reached an all-time high of USD 184 trillion. The worlds three major manufacturing and producing giants, the United States, China and Japan accounting for more than half of it.
This increased trend has been witnessed since the past several years and according to reports earlier this year, the IMF had calculated the global debt to be around USD 182 trillion.
In its latest update, the IMF said the global debt has reached an all-time high of USD 184 trillion.The updated amount, in nominal terms, is the equivalent of 225 per cent of the world GDP in 2017.
On average, the world’s debt now exceeds USD 86,000 per person more than twice the average income per-capita. The top three borrowers in the world (United States, China, and Japan) account for more than half of the global debt, exceeding their share of global output.
What is interesting to note is the emergence of China among the top ranking is, however, a relatively new development. Since the beginning of the millennium, China’s share in global debt has gone up from less than three per cent to over 15 per cent, underscoring the rapid credit surge in the aftermath of the global financial crisis.
Finances are raised by households, businesses and governments on the assumption that they will service their debts either by paying the principal and interest or by rolling over the debts into new loans. But this works only if incomes grow fast enough to make the debts bearable or to justify new loans. When those ingredients go missing, delinquencies, defaults and (at worse) panic follows in the markets.
The raise in global debt has been witnessed since the past 15 years now. Since 2003, global debt has soared. As a share of the world economy (gross domestic product), the increase has gone from 248 percent of GDP to 318 percent. In the first quarter of 2018 alone, global debt rose by a huge $8 trillion. The figures include all major countries and most types of debt is borne by the consumer, business and the governments.
But to service these debts requires rising incomes, while an expanding trade war threatens to squeeze incomes. The resort to more tariffs and trade restrictions will make it harder for borrowers to pay their debts. This phenomenon is believed to trigger slow down in the global economy or it can also lead to a severe financial crisis.
Notably, the meaning of the $247 trillion debt overhang is that many countries (including China, India and other emerging-market countries) will be dealing with the consequences of high or unsustainable debts. This means that there will be a collective drag on the global economy and the developing countries can be in a fix.
India is already crippled by the lower market liquidity and the recent political developments have suggested that the central government may have to resort to farm loan waiver of around 4 Lakh crores. This surely means that the economy may be stressed with least chances of early revival.