April 21, 2022
Governments lessened the economic pain of the pandemic by providing plenty of liquidity to stricken consumers and businesses through credit guarantees, concessional lending, and moratoriums on interest payments. Though these policies proved effective in supporting balance sheets, they also led to a spike in private debt, extending a steady increase in leverage spurred by supportive financial conditions since the global financial crisis of 2008.
Global private debt surged by 13 percent of the world’s gross domestic product in 2020 – faster than the rise seen during the global financial crisis and almost as fast as public debt. It is estimated that recent levels of leverage could slow economic recovery by a cumulative 0.9 percent of GDP in advanced economies and 1.3 percent in emerging markets on average over the next three years.
The impact of the pandemic on the finances of households and firms has varied across countries and within them, reflecting differences in their policy responses and the sectoral composition of their economies.
Low-income households and vulnerable firms are typically less able to withstand a high level of debt. As a result, they are likely to make sharper cuts to consumption and investment spending in the future. The drag on future growth is therefore expected to be greatest in countries that experienced the largest increases in indebtedness among low-income households and vulnerable firms during the pandemic.
Consumers in China and South Africa saw the largest increases in household debt ratios among the countries for which detailed data are available. Among advanced economies, low-income households in the United States, Germany, and the United Kingdom saw relatively larger increases in debt than those in France and Italy, where leverage declined for poorer households.
The recent surge in indebtedness of households and firms poses risks to the pace of recovery. Yet this risk is not equally distributed. Careful, real-time monitoring of the balance sheets of low-income households and vulnerable firms is key to calibrating the unwinding of support measures. This could prevent sudden distress when financial conditions tighten.
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