The great hope for global growth is consumer spending. In developed markets such as the US and Europe, authorities have pushed interest rates to rock bottom, or even below, and are pumping more money than ever into the economy in an effort to boost spending. In many emerging markets, companies are betting that the consumer boom will last at least another decade.
In a 2012 report, McKinsey called consumer spending in emerging markets “the biggest growth opportunity in the history of capitalism,” predicting that by 2025 consumer spending will be $30 trillion (up from $12 trillion in 2010). Meanwhile, the data show that while consumption is rising, growth is debt-driven, both in developed and developing countries. Far from deleveraging after the financial crisis scare, households have accumulated more debt. More recent and sobering reports show that for 80% of the world’s countries household debt levels have increased relative to 2007-08.
With the sovereign debt crises in Europe, government debt is still the largest and most immediate problem in developed countries; overall, it is the sector that has taken on the most debt post-2007. But household debt has increased as well, in many cases from levels that were already considered risky then. Some countries have indeed deleveraged; this is true for Ireland, Spain, the UK, and the US (the core crisis countries).
But for the developed world in general, the trend is the reverse, with some of the sharpest increases seen in Scandinavia, Canada, and Australia, and with much of the increase tied to the ever-volatile housing market. Even in the UK, the Office for Budget Responsibility forecasts that by 2019 household debt levels will exceed the 2008 record-high level.
Emerging markets have had a far less bumpy ride in recent years, with the consequence that high consumer growth and affordability of high debt accumulation have been taken for granted by companies and households, respectively. Consumer debt in almost all emerging markets in Asia is at record levels. The main argument in favor of continued high consumer spending in emerging markets is demographics. The labor force is set to grow, and high labor-productivity gains are predicted. Also, the emerging markets’ household debt level relative to GDP is, in aggregate, less than half that of the developed markets.
However, what matters at least as much as the absolute level of debt is the rate of growth. Emerging markets that had comparatively low debt levels in 2007, but which had experienced very rapid debt growth previously, suffered some of the deepest and longest recessions (Hungary and Romania, for instance).
Just as the debt overhang is crippling for a government — public money is spent on paying off debt instead of going to infrastructure, health care, or social security — households can end up having to forfeit a huge share of their monthly income on debt repayments, with dire consequences for consumer spending.
In some developed countries (Scandinavia in particular, but also the Netherlands), while households have a very high level of debt, they also have very high assets. These countries may be less vulnerable to negative shocks. But this assumes that each household would be affected independently by a downturn and could simply liquidate assets in the case of, for example, unemployment or a sharp rise in interest rates. If a whole economic sector tries to deleverage, the effect is different. Asset prices will fall, and households’ net position will deteriorate abruptly. There is also the thorny question of how liquid assets are in the event of a crisis.
In most cases, global monetary authorities have recognized the debt problem, but are stumped as to how to address it. The worldwide low-inflation environment, and the low growth prevalent in many countries, makes it difficult to increase interest rates and thus discourage further debt accumulation. This monetary policy dilemma has been particularly visible in Sweden, but also in parts of Asia.
Debt-driven growth is unfortunately the only growth available now. It remains to be seen whether the global economy will soon switch to a higher growth rate, which will push down debt ratios, or whether the necessary adjustment will arrive via another crisis.