- China, Euro Area, India, Japan and the US have added USD29tn in debt since 2020.
- Public spending pressures have widened across infrastructure, defence, energy and food security.
- China faces fiscal strain from the property bust, ageing, and weak consolidation prospects.
- Euro Area and US debt burdens are high and rising.
- India and Japan look steadier, but higher real rates could still weaken debt dynamics.
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Through the pandemic, Ukraine war, US tariffs, and now the Iran war, the imperative for public spending has risen among the world’s largest economies, with no sign of abatement in the remainder of this decade. The push for more spending in various areas has been unrelenting, from infrastructure to defence, from shoring up energy supply to ensuring food security. Add to all these a steady shrinking of the labour force due to aging and tech disruption, the outlook for deficit and debt is dour.
We consider the big five borrowers of the world, China, Euro Area, India, Japan, and the US. These five have added USD29trln in debt since the 2020 pandemic, with China, Euro Area, and the US very likely to keep adding to their debt burdens for years to come. China is facing cyclical (property bust) and structural (aging) impediments to fiscal consolidation. Euro Area is committed spending more for energy security and defence infrastructure. US politically constrained to hike taxes or cut spending in a meaningful manner, while defence and entitlement spending keep soaring.
The IMF projects that China and the US will keep running general government deficits in the 7-8% of GDP range for years to come. India and Japan have favourable debt dynamics for now despite running high deficits, thanks to a relatively healthy dose of inflation and still-low real interest rates.
But the risk is high for real rates to remain elevated or climb further as global markets struggle to absorb the mountain of issuance, especially from the Euro Area and the US. War-induced inflation may fade, but the concerns around debt won’t.
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