Global Debt at Record High of $315 Trillion, Raising Alarms Over Potential Crises

Ira Singh
Khabar Khabaron Ki,31 May’24

Global debt has reportedly, reached to a new record of $315 trillion, nearly three times the world’s total GDP,in just the first quarter of the year (Q1,2024), despite rising interest rates curbing bank credit, with markets such as the China, India, and Mexico driving the rise.

According to the recent report published by the Institute of International Finance (IIF), global debt increased by $1.3 trillion, in the first quarter of 2024, due to increased borrowing by China, India, and Mexico .The global debt reached 93.2% of global GDP in 2023 as per IMF’s April Budget Bulletin. The report mentions that budget deficits are still higher than before the coronavirus pandemic.

According to estimates, this year’s budget deficit will increase global debt by $5.3 trillion.The governments are cutting taxes and increasing spending against the backdrop of a record number of elections this year.

While relatively optimistic short-term prospects for the global economy are a positive factor for debt dynamics, sustained inflation, especially in the United States, continues to pose significant risks, exerting upward pressure on global financing costs, according to experts opinion. Experts further expect this figure to rise to 93.8% in 2024, 95.1% in 2025, and 98.8% in 2029 due to the growth of US and Chinese government debt.

Impact of US Monetary Policy on Global debt
The IIF report highlights the influence of U.S. monetary policy on global debt dynamics. Persistent inflation in the United States has led to expectations that the Federal Reserve will delay interest rate cuts. This anticipated delay has strengthened the U.S. dollar, exacerbating debt servicing challenges for countries with significant dollar-denominated debt.

A dollar rally could again bring to the fore problems with government debt, especially for developing countries,” the IIF report warned. Developing economies are particularly vulnerable to fluctuations in the dollar’s value, as a stronger dollar increases the cost of servicing their debt, leading to heightened financial pressures.

Impact of Global Debt on Global GDP:A Looming Economic Challenge

The world is currently facing an unprecedented debt crisis, with total global debt reaching a staggering $315 trillion. This amount is nearly three times the global GDP, highlighting a significant economic imbalance. The ramifications of such high debt levels are extensive and deeply intertwined with global GDP, presenting a complex challenge for policymakers and economies worldwide.

The rapid increase in global debt has been driven by multiple factors. The COVID-19 pandemic necessitated extensive government borrowing to finance stimulus packages and support economic activity during lockdowns. Even as the pandemic wanes, many economies have continued to incur high levels of debt to sustain growth and recovery efforts.

Moreover, businesses and households have also increased their borrowing, taking advantage of previously low-interest rates. However, as central banks raise rates to combat inflation, the cost of servicing this debt is becoming more burdensome.

Impact On Global GDP
The relationship between high debt levels and global GDP is intricate and multifaceted.Here are some key ways in which soaring debt impacts the global economy:

1.Reduced Economic Growth:High levels of debt can stifle economic growth. Governments with substantial debt burdens may have to allocate a significant portion of their budgets to debt servicing, leaving less room for productive investments in infrastructure, education, and healthcare. This can hinder long-term economic growth and development.

2.Investment Constraints:As companies face higher debt servicing costs, they may cut back on capital investments. This reduction in business investment can slow innovation and productivity growth, further dampening GDP growth. Small and medium-sized enterprises (SMEs) are particularly vulnerable, as they often rely on borrowing to finance expansion and operations.

3.Consumer Spending Impact:Households with high debt levels may reduce their consumption to manage their debt repayments. Lower consumer spending can lead to reduced demand for goods and services, which negatively affects businesses and can slow economic growth.

Consumer confidence also tends to dip in high-debt environments, exacerbating the slowdown.

4.Increased Risk of Financial Crisis: High global debt levels increase the risk of financial crises. Defaults by heavily indebted governments, companies, or households can lead to banking sector instability. A financial crisis can result in severe recessions, as witnessed during the 2008 global financial crisis, which had long-lasting impacts on global GDP.

5.Fiscal Policy limitations: Governments with high debt levels have less fiscal space to maneuver during economic downturns. They may struggle to implement effective stimulus measures or respond to new crises, which can prolong recessions and slow recovery efforts, negatively impacting GDP.

Indian economy is likely to grow at 7 per cent in the current fiscal year starting April, the Reserve Bank of India (RBI) reportedly stated in its annual report released on Thursday.

As the world navigates the complexities of post-pandemic recovery, addressing the challenge of high global debt is crucial. Sustainable debt management is essential for maintaining economic stability and ensuring that global GDP growth remains strong and inclusive, believe experts.