(MENAFN- ValueWalk) Earlier this year, the Institute of International Finance warned that global debt growth has reached an "eye-watering" pace over the past decade and hit an all-time high of $215 trillion last year.
The IIF said total debt levels, including household, government and corporate debt, climbed by more than $70 trillion over the last ten years to a record high of $215 trillion in 2016 - or the equivalent of 325%of global gross domestic product.
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Most of the growth, the report warned, was driven by a "spectacular rise" in emerging markets, where total debt stood at $55 trillion at the end of 2016.
Ten years on from the great financial crisis, and it looks as if the world has not learned anything from this life-changing event. The global economy is finally starting to show signs of life after nearly a decade of sluggish performance but despite this backdrop, debt growth keeps rising.
The IMF estimates that the world economy will expand 3.6% in 2017, up from 3.2% recorded last year, and it is likely to grow 3.7% in 2018 -- the fastest rate of growth this year, and back to the 30-year average.
Debt Growth Is Holding Back GDP
Even though growth is picking up, credit rating agency Moody's argues that this growth will not make it any easier for policymakers to raise interest rates.
In a research report published at the end of last week, Moody's analysts point out that the "downshifting of US real GDP's 10-year average annual growth rate has coincided with a climb by the ratio of nonfinancial-sector debt to GDP." In other words, slowing economic growth has resulted in more leverage:
"When the average ratio of nonfinancial-sector debt to GDP rose from the 135% of 1960-1984 to the 175% of 1985-2001, the average annualized rate of real GDP growth slowed from 3.6% to 3.3%, respectively. In conjunction with the 229% average ratio of debt to GDP since 2001, real GDP growth has slowed to 1.9% annualized, on average."
However, what's interesting is that over the long term, benchmark Treasury Bond yields have tended to move in the direction " taken by the underlying rate of growth for the US's total nonfinancial-sector debt." Specifically, the report notes that the annualized growth rate of nonfinancial-sector debt peaked at the scintillating 12.4% of the span-ended Q4-1986. Not long after, the 10-year yield peaked at 10.68%. Then during the second quarter of 2017, leverage debt growth hit 4.1%, joined " by an easing of the benchmark Treasury yield's moving 10-year average to the 2.64% of the span ended September 2017."
Considering the above trends, Moody's analysts speculate that unless credit creation increases markedly from current levels, the 10-year yields moving average should be no greater than 2.5% by the end of 2018. If credit growth fails to materialize, the case for another interest rate rise becomes weaker. High levels of leverage are holding back economic growth.
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