COVID-19 to hit world debt harder than WWII, says GlobalData

Despite optimistic expectations around global economic recovery, global debt is expected to skyrocket by the end of 2021 due to continuous rise in government and corporate spending in response to the ‘Great Lockdown’ of the COVID-19 pandemic, says GlobalData. Analysis by the leading data and analytics company has highlighted that debt is forecast to surpass that of World War II levels.

Gargi Rao, Economic Research analyst at GlobalData, comments: “In 2020, global debt increased to $281 trillion, and rose by a further 2.55% in Q1 2021. Moreover, debt forecast is expected to reach 124.7% of GDP in 2021 among advanced economies which is higher than WWII levels of 124.1% of GDP.”

Developed economies accounted for the majority of global debt (70.2%) in Q1 2021. However, there has been an increase in the debt level of emerging economies to $86.2 trillion in Q1 2021, which is an increase of 14.7% over Q1 2020.

Rao notes: “Matured markets such as the US, the UK, euro area economy and Japan witnessed a sharp rise in household, government, non-financial corporate and financial sector debt over last year. With higher debt comes higher obligation of interest payments, which curtails the opportunity for productive investments and, thereby, affects long-term sustainable economic growth.

“A persistent increase in the debt levels of emerging and developed economies due to pandemic-induced stimulus packages has set global debt to alarming levels. As economic recovery gathers momentum, central banks will have to strike a balance between managing quantitative easing policies and inflation in the long run.”

Japan, Italy, and the US exhibited high levels of general government debt as of 2020. Japan’s government debt as a percentage of its GDP stood at 256.2% in 2020, followed by Greece (213.1%), Italy (155.5%) and the US (127.1%). Meanwhile, government debt in emerging nations such as Brazil (98.9%), India (89.5%) and China (66.8%) were relatively low but increased over the last year.

Moreover, private sector debts also witnessed a significant surge in 2020, and is expected to rise further in 2021. The average debt of non-financial corporations globally stood at 104.1% in 2020, which is an increase from 95.5% in 2019.

Rao adds: “The new funds helped corporates to stay steady amid lockdowns, but debt burden is likely to compel them to divert funds towards repaying instead of investing in facilities or expanding payrolls.

“The need of the hour is to implement policies to revive government finances and reduce debt levels. While EU countries’ 2021 budgets are focusing on reviving government revenues and control expenditures, Japan is expected to channel its fiscal support towards building climate-resilient infra projects to attract investment and generate government revenues in the medium term. Furthermore, the US’s rescue packages would create fiscal space for the coming years.

“The world’s main challenge is to find a well-designed exit strategy from these extraordinary fiscal expenditures. Over the medium-term, fiscal crunches are forecast to ease due to the revival of business activities alongside effective vaccination drives and accelerated economic recoveries globally.”

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