The world economy is still built on debt.
That's the warning today from McKinsey & Co.'s research division which estimates that since 2007, the IOUs of governments, companies, households and financial firms in 47 countries has grown by $57 trillion to $199 trillion, a rise equivalent to 17 percentage points of gross domestic product.
While not as big a gain as the 23 point surge in debt witnessed in the seven years before the financial crisis, the new data make a mockery of the hope that the turmoil and subsequent global recession would put the globe on a more sustainable path. Government debt alone has swelled by $25 trillion over the past seven years and developing economies are responsible for almost half of the overall gain.
McKinsey sees little reason to think the trajectory of rising leverage will change any time soon.
Here are three areas of particular concern:
1. Debt is too high for either austerity or growth to cure
Politicians will instead need to consider more unorthodox measures such as asset sales, one-off tax hikes and perhaps debt restructuring programs.
2. Households in some nations are still boosting debts
Eighty percent of households have a higher debt than in 2007 including some in northern Europe as well as Canada and Australia.
3. China's debt is rising rapidly
Thanks to real estate and shadow banking, debt in the world's second-largest economy has quadrupled from $7 trillion in 2007 to $28 trillion in the middle of last year. At 282 percent of GDP, the debt burden is now larger than that of the U.S. or Germany. Especially worrisome to McKinsey is that half the loans are linked to the cooling property sector.