19 November 2020

Insights

Debt Tsunami

At this time of year forecasters begin releasing their outlook for 2021 documents. There is a clear consensus that 2021 will be a better year than 2020 for growth and asset prices.

To say GDP growth will be higher next year seems a foregone conclusion. The global economy is forecast to shrink 4.4% this year and expand 5.2% in 2021 according to estimates from the IMF.

At a virtual banking conference in Australia yesterday Bank CEOs were tripping over each other with their positive outlook for 2021, with the Head of CBA stating “I don’t think the housing market is at risk anymore.”

Australian regulators were chided by the Government for hurting the flow of credit and attempting to usurp the parliament. Investment managers were encouraged to seek alpha and not hug benchmarks.

Forecasters are bullish stocks, commodities, property, Bitcoin ... in fact most asset classes. Everyone is bullish everything, whilst debt levels soar globally. What can go wrong?

The Institute for International Finance (IIF) in a just released report sees global debt rising to a new record USD 277 trillion by the end of 2020 or 365% of global GDP after finishing 2019 at 320% of GDP.

Developed markets' overall debt jumped to 432% of gross domestic product (GDP) in the third quarter (3Q), from a ratio of about 380% at the end of 2019. Emerging market debt-to-GDP hit nearly 250% in 3Q, with China reaching 335%, and for the year the ratio is expected to reach about 365% of global GDP.

Much of this increase has occurred on Government Balance Sheets as in many countries personal savings rates have soared.

Debt only becomes an issue when debt servicing becomes onerous and interest rate cuts have reduced debt servicing in most developed markets. This is not the case in emerging markets partly due to decreased taxation revenues.

source: Financial Times

The increase in debt over the past 4 years has done little to accelerate global GDP growth from trend and in many countries growth has been below trend. It’s like running up a hill that never ends with a constant energy boost from Central Bank rate cuts.

source: IMF

source: IMF

Summary

The IIF described all of this as a “debt tsunami”.

One of the consequences of increased Government Debt is likely to be lower rates for longer.

For now its all systems go for growth "Damn the torpedoes, full speed ahead"

David (Bushy) Nolan

*Beckon Capital Pty Limited (ABN 49 628 013 678), authorised representative No. 001280538 of Fundhost Limited (ABN 69 092 517 087, AFSL No. 233045) (“Beckon”)