Since the global financial crisis aggregate debt levels have risen. Governments and non-financial corporates have contributed the most to this debt build up, particularly in the US and China. In this week’s IDB we consider the implications of rising levels of debt.
Current economic conditions are mixed and not conducive to debt reduction. Potential growth rates are falling due to subdued investment and weak productivity growth. Low inflation has exacerbated the issue of rising debt and, post crisis, fiscal tightening has forced Central Banks into aggressive Quantitative Easing (QE) measures and low interest rates.
High debt levels threaten future economic growth, increase the risk of market volatility and lower future asset market returns. Escalating debt compromises fiscal and monetary policies, requiring Central Banks to remain crucial to the financial markets. The result is a new normal of low growth, low inflation and low nominal and real rates, which reinforces the need for income generating assets within client portfolios.