The whole world in debt, says management consultancy

A man works with a made in China quilting embroidery machine at a factory producing blankets, sheets, pillows and cushions at a village outside Hanoi January 27, 2015. — Reuters pic
A man works with a made in China quilting embroidery machine at a factory producing blankets, sheets, pillows and cushions at a village outside Hanoi January 27, 2015. — Reuters pic

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NEW YORK, Feb 5 — The world economy is still built on debt.

That’s the warning today from McKinsey & Co.’s research division which estimates that since 2007, the IOUs of governments, companies, households and financial firms in 47 countries has grown by US$57 trillion to US$199 trillion (RM 203.12 trillion to RM709.136 trillion), a rise equivalent to 17 percentage points of gross domestic product. 

While not as big a gain as the 23 point surge in debt witnessed in the seven years before the financial crisis, the new data make a mockery of the hope that the turmoil and subsequent global recession would put the globe on a more sustainable path. Government debt alone has swelled by US$25 trillion over the past seven years and developing economies are responsible for almost half of the overall gain.

McKinsey sees little reason to think the trajectory of rising leverage will change any time soon. 

Here are three areas of particular concern:1. Debt is too high for either austerity or growth to cure

Politicians will instead need to consider more unorthodox measures such as asset sales, one-off tax hikes and perhaps debt restructuring programs. 

Source: McKinsey2. Households in some nations are still boosting debts

Eighty per cent of households have a higher debt than in 2007 including some in northern Europe as well as Canada and Australia.

Thanks to real estate and shadow banking, debt in the world’s second-largest economy has quadrupled from US$7 trillion in 2007 to US$28 trillion in the middle of last year. 

At 282 per cent of GDP, the debt burden is now larger than that of the US or Germany. Especially worrisome to McKinsey is that half the loans are linked to the cooling property sector. — Bloomberg

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