WORKING DRAFT Last Modified 5/19/2015 9:06 AM Malay Peninsula Standard Time Printed 3/12/2015 1:48 PM Eastern Standard Time
Debt and (not much) deleveraging
Key messages 1
Global debt has grown by $49 trillion since the crisis, and no major economy has reduced total debt-to-GDP
2
There are three areas of particular concern: • High government debt in some advanced economies • Continued rise of household debt in a range of countries • Quadrupling of China’s debt
3
The financial sector has deleveraged and risky forms of shadow banking have declined – but non-bank credit is growing in importance
4
To avoid the boom-bust credit cycles of the past, we need a broader range of tools to create, monitor, and discharge debt
1
What happened to deleveraging? 2
Global debt in the real economy has increased by $49 trillion since 2007 Global debt outstanding by type1 $ trillion, constant 2013 exchange rates 199 40
Household
56
Corporate
58
Government
37
45
Financial
4Q00
4Q07
2Q141
246
269
286
142 33 87
38
19 26
33
22 20
Total debt as % of GDP
1 2Q14 data for advanced economies and China; 4Q13 data for other developing economies. SOURCE: McKinsey Global Institute analysis
3
The ratio of debt to GDP has increased in all advanced economies since 2007 Change in debt-to-GDP ratio,1 2007–14 Percentage points
Advanced
180
Increasing leverage 130 120 110 100 90 80 70 60 50 40 30 20 10 0 -10 -20 -30 -40
Ireland
Developing Leveraging
Singapore Greece China
Portugal
Spain
Finland
France Belgium Slovakia Malaysia Italy Netherlands Thailand Korea Poland Czech Republic Sweden Austria Canada Denmark Chile Indonesia Australia Mexico Brazil United Kingdom Turkey Morocco Russia United States Norway Vietnam Colombia Nigeria Germany Hungary Philippines India Argentina Peru South Africa Romania Egypt Saudi Arabia Israel
Japan
Deleveraging 0
30
60
90
120
150
180
210
240
Deleveraging
270
1 Debt owed by households, non-financial corporates, and governments. 2 2Q14 data for advanced economies and China; 4Q13 data for other developing economies. SOURCE: Haver Analytics; national sources; McKinsey Global Institute analysis
300
330
360
390
420
Debt-to-GDP ratio, 2Q141,2 %
4
Government debt
Continued risks ahead 5
Government debt has grown by $25 trillion since 2007, with advanced economies accounting for $19 trillion Stock of government debt $ trillion
Government debt-to-GDP ratio, 2014 %
234
Japan Developing
Advanced
Greece
183
58
148
Portugal
11
+$6T
33 5
139
Belgium
135 132
Spain
47 28
2007
Italy
2014
+$19T
115
Ireland Singapore
105
France
104
United Kingdom
92
United States
89
SOURCE: Haver Analytics; national sources; IMF WEO; BIS; McKinsey Global Institute analysis
6
Growth or austerity measures alone won’t work in highly indebted economies GDP growth projection, 2014-19 Additional growth required
To start government sector deleveraging … Fiscal adjustment required, %
Real GDP growth rate required, % 4.9
Spain 4.1
Japan 3.6
Portugal 2.5
France United Kingdom
1.9
Italy
1.9 1.1
Netherlands 0.7
Belgium United States
1.7 1.1
N/A
Greece
N/A
Germany
N/A
SOURCE: Haver Analytics; national sources; IMF WEO; BIS; McKinsey Global Institute analysis
1.8 2.5
1.5
2.5
3.9 4.0
2.5 0.9
2.2
1.4
1.6
4.7
2.3 1.3
1.6
3.0
0.6 2.2 0.3 3.1
2.8 3.0 2.5 1.6
5.5
2.9
1.4
0.2
Ireland
3.8
3.0 2.5
1.6
7
As a result of QE, central banks own ~20 percent of government bonds in the US, UK, and Japan. Will these bonds ever be repaid? Central bank ownership of government bonds % 24 22
16
Bank of Japan's QE announcement to purchase $667 billion government bonds per annum would take its ownership of government bonds to 40% in 3 years
ECB recently announced a new QE program to purchase government bonds worth $1.25 trillion i.e. ~14% of current bonds outstanding ($9 Trillion), by September 2016 United Kingdom
Japan
United States
SOURCE: Haver Analytics; national sources; IMF WEO; BIS; McKinsey Global Institute analysis
8
Focusing on net government debt rather than gross debt is important when assessing sustainability Gross debt
Government debt-to-GDP ratio %, 2014
Gross debt, excluding central bank holdings
Net debt, excluding central bank holdings1
234 190
-141 p.p.
89
76
94
92 67
United States
71
63
United Kingdom
Japan
1 IMF’s net debt figures for 2014, less government securities held by central bank as of 2Q14. NOTE: Numbers may not sum due to rounding. SOURCE: McKinsey Global Institute analysis
9
Household Hidden debt time bomb?
10
Household debt outside the core crisis countries continues to grow – to much higher levels XX Change in debt-to-income ratio, 2007–2Q14 Percentage points
Household debt-to-income ratio, 2000–2Q14 % 325
325
300
300
275
275
250
250
225
225
200
200
South Korea
7 18
Thailand
28
Finland
11
France
15
100 75 50
25
25
0
0
07
SOURCE: McKinsey Global Institute analysis
2Q14
Singapore
Malaysia
50
2000
Australia
125
United -17 Kingdom
75
10 10
22
150
United States
Netherlands
Canada
175
100
-5
150
-33
-13 -26
Norway
Sweden
Ireland
Spain
2
20 19
175
125
Denmark
2000
07
2Q14
11
Changes in house prices are correlated with changes in household debt-to-income across countries Advanced economies
Change in household debt to income 2007–13, Percentage points
Developing economies
Correlation coefficient = 60% 35 30
Singapore Thailand
25
Korea
20 15
Sweden
Czech Republic
10
Netherlands
5
France
Denmark Italy
Canada
Belgium Russia Australia
South Africa
-5
Malaysia
Indonesia
Finland
0
China
Poland
Norway
Japan Germany
-10
Spain
-15
United Kingdom
-20 -25
Ireland
United States
-30 -45 -40 -35 -30 -25 -20 -15 -10
-5
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
Change in house price 2007–13, % SOURCE: McKinsey Global Institute analysis
12
Sustainability depends on who is taking on debt: Denmark and the United States provide two contrasts 2000
Median debt-to-income ratio for indebted households by income percentile, % Denmark
2007
United States 280 263 205
194
192
178
196 157
140 117 79
Income percentile Change in debt-toincome ratio, 2001–07 Percentage points Median debtto-income ratio, 2013, %
216 74
231
160
138
80
115
135
125
116
104
55
52