Debt and (not much) deleveraging

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) delev...
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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