2023-09-14 18:02:55
The debt of governments, businesses and households has been growing for decades. This is generally true in Canada, but not only. This is also the case in most other countries which will have to look harder and harder for a way to regain control of the situation.
Global debt burden fell for second consecutive year in 2022, reported Wednesday the International Monetary Fund (IMF). At US$235 trillion, total public and private debt was equivalent to just under two and a half times the value of all wealth produced last year (238% of global gross domestic product). , a decrease from the peak of 258% reached during the darkest days of the COVID pandemic in 2020 as well as the following year (248%). However, we still remain above the pre-pandemic level (229%) in what seems to be only a simple return to the major past trend, that is to say a slow and inexorable increase in current debt. since the 1950s when this proportion was still less than 100%.
“A lesson from recent history appears to be that when debts rise, they rarely return to their previous levels,” the IMF observed.
The phenomenon was particularly observed in terms of public authorities’ debt, the weight of which first decreased at the end of the Second World War thanks to strong economic growth before starting to rise once more in the mid-1970s. going from an average of 36% of global GDP to more than 90% last year. As for the private debt of businesses and households, the increase has been more constant, to the point of tripling since the 1950s (from 41% to 146% today), despite a slight decline in the wake of the financial crisis of 2008.
In recent years, the increase in global debt has been due in particular to China, whose development has relied heavily on credit investment from public authorities (debt of 64% of its GDP in 1985, rising to 195% l last year) as well as that of private actors (from 98% in 2006, rising to 134% in 2022). The world’s second largest economy now accounts for more than a quarter (28%) of global private debt. Which explains, in particular, why everyone is currently so nervous regarding the colossal debt problems in their real estate sector.
Meanwhile in Canada
Canada is no exception. Close to 67% of its GDP on the eve of the last financial crisis in 2008, the debt burden of its public authorities increased gradually (to 90% in 2019) before jumping during the pandemic (119% in 2020), then recover a little since then (107% in 2022). The debt of its companies (from 107% in 1990 to 165% last year), like that of households (from 40% in the mid-1980s to 102% in 2022), has followed the same upward trajectory.
In this context, experts observe, the slowdown in economic growth is not good news. No more than the accelerated increase in interest rates which apply precisely to these increasingly heavy debts. The latter will have to be extra vigilant to prevent too many households and businesses from being drawn into the fund by the weight of their debts, warns the IMF. Failing to be able to reverse the state of their own finances overnight, governments should also, at the very least, credibly indicate how they intend to put themselves back on a more sustainable trajectory in the medium term.
In his last Monetary Policy Report, the Bank of Canada recognized, in July, that the sharp increase in its interest rates “has increased debt service and reduced liquid resources” of households and businesses. While many Canadians remain healthy due to a strong job market and greater savings during the pandemic, “a smaller portion of households are experiencing considerable financial stress.” The number of the latter is however set to grow, observed the central bank, since due to differences in maturities on loans in force, only around a third of mortgage borrowers have been directly affected by rate increases until now.
Tax increases?
In his last Economic outlook in June, the OECD found it difficult to see how governments will manage to reduce their lifestyles following the budgetary shock of the pandemic, the war in Ukraine and the energy crisis that followed. And this, even if they have the good idea to tighten and better target their aid measures to cushion the impact of inflation. This is because, “many of them will have to face increased tensions on future expenditure linked to demographic aging, climate transition and [justement] to the increase in the burden of servicing the public debt due to the rise in interest rates.
And it’s not just that. The war in Ukraine has revived the desire of states to arm themselves while the pandemic has brought back into fashion more interventionist governments whose industrial policies fuel subsidies, observed experts in the Financial Times at the beginning of the month.
In this context, the weight of public debt will not be able to decrease much in the coming years. On the contrary, our experts continued. As economic growth promises to be sluggish and will probably not be strong enough to finance all these new initiatives, governments will quickly be faced with the obligation to lower their ambitions or resort to one form or another of an increase. of taxes.
However, the work of persuasion will not be easy among populations already struggling with a sharp increase in the cost of living and sluggish economic growth. Not to mention their high level of debt.
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