How has COVID-19 affected global debt?

  • Falling income combined with costly pandemic relief measures have increased global debt by $ 20 trillion since the third quarter of 2019.
  • By the end of the year, economists expect global debt to reach $ 277 trillion, or 365 percent of global GDP.
  • Excluding the financial sector, Canada’s debt-to-GDP ratio increased by almost 80%, the highest of any developed country.
  • Australia was one of the few countries that succeeded in reducing household debt during the year.

Besides the financial sector, Canada’s debt-to-GDP ratio increased by almost 80% in 2020.

Image: IIF, Deutsche Bank

With vaccines slowly gaining approval in various countries, the world could finally be on track to overcome the COVID-19 pandemic.

On the other hand, the economic situation is not expected to improve anytime soon. Falling incomes combined with costly pandemic relief measures have increased global debt by $ 20 trillion since the third quarter of 2019. By the end of 2020, economists expect the Global debt reaches $ 277 trillion, or 365% of global GDP.

Today’s chart uses data from the Institute of International Finance (IIF) to provide an overview of where debt, relative to GDP, has increased the most.

Compare developed and emerging markets

Developed economies represent four of the five countries with the largest increases in the debt-to-GDP ratio, but a more macroeconomic examination reveals that debt levels are increasing at a similar rate around the world.

Compare developed and emerging markets

Global debts in emerging markets grew 7.9% in 2020.

Image: IIF, BIS, IMF, Haver, national sources

To put these numbers into perspective, economists often use the debt-to-GDP ratio, which compares a country’s debt to its economic output. As the name suggests, it is calculated by taking a country’s total debt and dividing it by its annual GDP. A low debt-to-GDP ratio suggests that a country will have little difficulty in repaying its debts, while a high ratio can be interpreted as a sign of a higher risk of default.

The actual definition of a “low” or “high” ratio is rather vague, although the world Bank estimates that there is a threshold for public debt at 77% of GDP. It has been found that each percentage point above this threshold decreases 0.017 percentage point of annual growth.

Comparison of debt to GDP by sector

To see how COVID-19 has affected the global economy since Q3 2019, let’s take a look at each industry’s debt as a percentage of GDP.

Comparison of debt to GDP by sector.

The debt of non-financials increased by 103% of the world total.

Image: IIF, BIS, Haver, national sources

In developed markets, the public debt-to-GDP ratio increased by 21 percentage points compared to 11 for non-financial corporations and 6 for households. This is not surprising since governments have provided billions (or in some cases, Billions) economic stimulation while generating less tax revenue.

The story in emerging markets is slightly different, with non-financial companies seeing the largest increase at 11 percentage points. The sector’s debt now stands at 104% of GDP, making it the most indebted in the region.

Highlights of today’s chart

Today’s chart summarizes this data at the country level, allowing us to identify two outliers: Canada and Australia.

Excluding the financial sector, Canada’s debt-to-GDP ratio increased by almost 80%, the highest of any developed country. Government borrowing surged as the Canada Emergency Benefit (CEP), which provided struggling Canadians with about $ 1,500 a month, cost $ 60 billion over 7 months.

Rising debt was not the only reason for the country’s worsening debt-to-GDP ratios. In the second quarter of 2020, Canada’s GDP fell at an annualized rate of 38%, its worst three-month performance on record.

Quarterly percentage change

There has been a dramatic increase in 2020 over the past 12 years.

Image: Statistics Canada

Australia was another outlier, but for a different reason; the country’s household debt fell by almost 5% relative to GDP. This was probably due to a early access program which has enabled millions of Australians to withdraw from their Superannuation, a social security fund similar to America’s 401 (k).

We know that nearly 60% of those who access their [superannuation] early on used it … to meet essential daily expenses, including debt repayment.

—Josh Frydenberg, Treasurer of the Commonwealth of Australia

Officials have been cautious about prolonged use of these programs, as retirement pension funds are meant to support people until retirement. Of the 2.6 million Australians who accessed their retirement pensions earlier, 500,000 are said to have completely emptied their accounts.

The debt-to-GDP ratio is on the verge of falling… or is it really?

A global deployment of COVID-19 vaccines is expected to end the ongoing health crisis and allow the economy to return to pre-pandemic levels, although delays are to be expected.

Either way, it heralds good news for governments and financial institutions around the world: economic output will pick up, lowering debt-to-GDP ratios. However, it is much more difficult to predict whether or not borrowing will slow down.

Government borrowing has been used to stimulate growth since 2008, and with 75% of Americans in favor of a second COVID-19 relief bill, public debt is likely to accumulate further. Private sector debt follows a similar trend, with US non-financial corporations owing $ 10.9 trillion in the second quarter of 2020, up from $ 6.4 billion at the start of 2008.

Those growing debts have been manageable thanks to a prolonged period of low interest rates and lax monetary policy, but it remains to be seen whether this is sustainable or not.

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About Natalee Broderick

Natalee Broderick

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