By Rodrigo Campos and Harry Robertson
NEW YORK/LONDON (Reuters) -Global debt hit a record $307 trillion in the second quarter of the year despite rising interest rates curbing bank credit, with markets such as the United States and Japan driving the rise, the Institute of International Finance (IIF) said on Tuesday.
The financial services trade group said in a report that global debt in dollar terms had risen by $10 trillion in the first half of 2023 and by $100 trillion over the past decade.
The latest increase has lifted the global debt-to-GDP ratio for a second straight quarter to 336%. A slowdown in growth, alongside a deceleration in price increases, have caused nominal GDP to expand less slowly than debt levels and were behind the debt ratio rise, the report said.
"The debt-to-GDP ratio actually has resumed its upward trajectory," said Emre Tiftik, director of sustainability research at the IIF at a news conference.
"Notably this rise comes after seven consecutive quarters of declining debt ratios and it mostly reflects the impact of easing inflationary pressures."
The IIF said that with wage and price pressures moderating, even if not to their targets, they expect the debt to output ratio to surpass 337% by year-end.
Experts and policy makers have warned in recent months of rising levels of debt, which can force countries, corporations and households to tighten their belts and rein in spending and investments, in turn crimping growth and hit living standards.
More than 80% of the latest build up had come from the developed world with the U.S., Japan, Britain and France registering the largest increases. Among emerging markets, the biggest rises came from the largest economies, namely China, India, and Brazil.
"For the first time in a long time there's a better trend among emerging markets than there has been among developed markets," said Todd Martinez, co-head of the Americas sovereign team at Fitch Ratings, which sponsored the IIF report.
"Developed markets after the pandemic, they're taking longer to get back to their pre-crisis fiscal positions than EM did, and then a lot of them got hit by this energy shock (from the war in Ukraine)."
The report found that household debt-to-GDP in emerging markets was still above pre-COVID-19 levels, largely due to China, Korea and Thailand. However, the same ratio in mature markets has dropped to its lowest level in two decades in the first six months of the year.
"The good news is that consumer debt burdens appear to have remained largely manageable," Tiftik said. "If inflationary pressures persist, the health of the household balance sheet, especially in the U.S., will provide a cushion against further Fed rate hikes."
Markets are not pricing in a U.S. Federal Reserve rate hike in the near future, but the target rate of between 5.25% and 5.5% is currently expected to remain in place until at least May of next year, according to the CME FedWatch tool.
U.S. rates are expected to remain high for a long period, which could pressure emerging markets as needed investment is funnelled to the less-risky developed world.
The Fed is expected to leave rates unchanged on Wednesday, but could signal that it is open to further rate hikes.
(Reporting by Rodrigo Campos and Harry Robertson, editing by Karin Strohecker, Alexander Smith and Aurora Ellis)