Will Ballooning Government Debt Hurt Global Growth?

Will Ballooning Government Debt Hurt Global Growth?

Highlights:

  • Government debt continues to climb around the world and is expected to reach another high in 2018.
  • The U.S. issued a significant portion of world government debt and the national debt is predicted to grow significantly over the next 10 years, becoming a large percentage of the overall GDP.
  • While government debt may not signal immediate trouble for the global economy, it is a sign that many countries have major fiscal challenges that may make an economic slowdown or recession more difficult to overcome.

Around the world, governments will borrow a total of $7.4 trillion in 2018, as projected by Standard & Poor’s;[1] making 2018 the third year in a row global debt hits a new record. The U.S. is set to make up around one-third of that total, and together the U.S. and Japan would account for more than half of it.

Not only is global government debt ballooning as a raw number, but government debt as a proportion of gross domestic product (GDP) also continues to soar[2]. In fact, government debt in developed markets overall has been more than 100 percent of GDP for more than five years. With Baby Boomers getting closer to retirement, governments may need to take on even more debt to take care of them as they age.

It is not just advanced economies seeing debt levels skyrocket – emerging economies are experiencing it as well. China is third on the list of biggest borrowers, and is set to issue around $700 billion in debt in 2018. India and Brazil will also be major borrowers this year.

Why Does Debt Matter?

Burgeoning global government debt matters because countries with higher levels of debt have a harder time when interest rates rise. A government that is too tied up trying to meet its ever-higher interest payments is not as able to spend that money to grow its economy.

In the event of an economic downturn, countries with greater debt levels have less flexibility to implement ways to boost it back up. Historically, weak fiscal positions make for longer and deeper recessions.[3] Especially in 2018, when private debt has also risen significantly, having governments with such large government debt loads could be worrisome.

The U.S. could be exhibiting this problem in the next several years, as the government is proposing to grow the national debt from $16 trillion at the end of 2018 to about $29 trillion by 2028. Total federal debt is expected to exceed 96 percent of GDP by 2028 – a level that places significant financial burden on the economy. The U.S. recently implemented tax cuts, but there has been no corresponding cut in spending, and the country continues to shoulder debt from an ongoing war in Iraq and the ongoing aftermath effects of the GFC. Costs of entitlements like Medicare, Medicaid, and Social Security are also surging, and will continue to do so as Boomers age.

With interest rates still at low levels worldwide and global economic growth still strong, these high debt levels might not be an immediate problem for many countries, including the U.S. Even though rates are relatively low, interest costs are now adding up on a larger and larger share of fiscal budgets around the world. Rates are also rising and appear likely to continue to rise in the U.S. The European Central Bank plans to raise rates at some point in the future as it begins to normalize its monetary policy after the GFC (they haven’t started the hiking process yet). Rates are also set to rise in Europe as well.

Growing Government Debt Levels Could Hobble Economies and Global Investments

Although we are several years on the other side of the GFC, governments are still dealing with the aftermath of the crisis and high debt levels worldwide. Debt is costly even when rates are low, and debt-laden countries will be in weak fiscal positions if another downturn hits.

Global investors should also be aware of the potential negative effects of ballooning global government debt. Economic environments may be relatively benign now, but in the event of a shock or deceleration, a buildup of debt can mean longer-term economic trouble for countries, including the U.S.

Segal Marco Advisors provides consulting advice on asset allocation, investment strategy, manager searches, performance measurement and related issues. The information and opinions herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Segal Marco Advisors’ R2 Blog and the data and analysis herein is intended for general education only and not as investment advice. It is not intended for use as a basis for investment decisions, nor should it be construed as advice designed to meet the needs of any particular investor. Please contact Segal Marco Advisors or another qualified investment professional for advice regarding the evaluation of any specific information, opinion, advice, or other content. Of course, on all matters involving legal interpretations and regulatory issues, investors should consult legal counsel.

 

[1] https://www.spglobal.com/our-insights/Sovereign-Debt-2018-Global-Borrowing-to-Remain-Steady-At-US74-Trillion.html

[2] https://www.imf.org/en/Publications/FM/Issues/2018/04/06/fiscal-monitor-april-2018

[3]  https://www.imf.org/en/Publications/FM/Issues/2018/04/06/fiscal-monitor-april-2018

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