What is the relation between falling growth and rising debt

Earlier this week I came across this article on Pictet’s blog, and given I wasn’t familiar with the relation between debt and growth, I’m sharing some facts and thoughts from the (brief) research I did to understand this better. If you want to recommend additional sources/concepts that should be included, feel free to contact me.

1/ There is a steady rise in public and private debt in relation to GPD

According to the data on Pictet’s article, debt has been growing fast globally:

YearDebt as a % of GDP
2021125% (OECD estimate)

What influenced this in recent years

1999 – 2000 dot com boom → Loss of faith in overvalued tech companies that couldn’t justify their valuations.

2007 – 2008 household debt boom → People were taking far more loans that they could pay back and it all collapsed in a deep global recession.

2010 – 2012 government debt boom → Investors lost faith in governments ability to repay their debt, starting from Greece.

2/ Government spending doesn’t generate a growth return

According to Pictet, in the US for example, the percentage of real growth that comes from every additional percentage of debt is dropping since the 1960s:

PeriodReal growth
1960 – 19882.6%
1982 – 20011.7%
2000 – 20200.7%

3/ A group of researchers suggested that the debt-to-GDP threshold that shouldn’t be crossed is 90%

In 2010, Carmen Reinhart and Kenneth Rogoff wrote the paper Growth in a Time of Debt where they proposed an idea that heavily influenced government policies but was later challenged and even completely rejected by many analysts and economists.

As shown in their graph below, their analysis concluded that once debt goes above 90% of GDP, countries suffer basically.

Source: Growth in times of debt

4/ Not everyone agrees that specific levels of debt impact growth negatively

In 2014, 6 years after the financial crisis, the International Monetary Fund researchers published the paper Debt and Growth: Is There a Magic Threshold where they looked at debt and growth data of various countries.

They came to the conclusion that even though in the short term high levels of debt can have a negative impact on growth, there isn’t a clear threshold that triggers a decline in growth.

Source: Debt and Growth: Is There a Magic Threshold?

Feel free to suggest additional resources I should include in this article.

Thanks for reading 🙏