An ongoing debate among economists is whether there is a level of sovereign debt-to-GDP which would hamper a nation’s economic growth prospects. It appears that we may soon find out. 

The fiscal action in response to Covid was unprecedented at about $12 trillion globally. This raised the pulse of households and firms but also haunted governments’ balance sheets, with global public debt rising to almost 100 per cent of GDP this year from 83 per cent in 2019. In 2020, headline fiscal deficits in advanced economies are expected to be five times higher than in 2019.

While debt-to-GDP levels will likely stabilize after this year, fiscal spending may not vanish like ghosts. Living standards will be falling in most of the world, and the IMF estimates the number of people in extreme poverty will increase by 80 to 90 million. This breathes life into other spectres like malnutrition and lack of access to healthcare and education.

But it’s also fair for investors to feel nervous about the ability of governments to repay the debt that is piling up. Unconventional monetary policies, like yield curve control and quantitative easing, are helping governments by keeping bond yields low. The hope is that these policies will assist in reducing the debt-to-GDP ratio over time, as nominal interest rates are kept constantly below nominal rates of GDP growth.

While this appears the most likely scenario in the immediate future, the key test for central bankers maintaining ultra-easy monetary policy will come should inflation begin to levitate. If central banks around the world fail to tighten the noose around rising inflation - one consequence of which is to alleviate debt loads - it may be the formal end of their independence.

Anthony Doyle

Anthony Doyle

Investment Specialist

Bob Chen

Bob Chen

Investment Writer

Mark J Hamilton

Mark J Hamilton

Senior Graphic Designer