Fall in global debt for first time in a decade raises hopes of no repeat for financial crisis

GLOBAL debt fell last year for the first time since the turn of the decade, raising hopes that the financial system can avoid another crisis.

The first dip in borrowing since 2010 comes as interest rates at last begin to rise around the world and debt becomes less affordable.

Debts surged from 172.1pc of GDP in 2001 to 219.5pc in 2016, but then fell back to 218.3pc last year, according to an Invesco analysis of data from the Bank for International Settlements.

The analysis of household, government and non-financial corporate debt compares borrowing on a purchasing power parity basis, rather than a simple conversion into US dollars, to avoid skewing the total figure in line with US dollar movements.

In part, the debt is falling because of GDP growth, which improves the ratio. China’s debts are up to a similar size to those in the UK or US, but its faster GDP growth means it appears more sustainable.

The ratio fell in countries including Spain, Belgium and the Netherlands, while it increased in Brazil and China, where corporate debt levels dipped but government debts increased. Paul Jackson, head of research at Invesco, said the fall globally should make the world a little less vulnerable to a future financial crisis, and should be positive as long as it was not caused by a sudden restriction in lending or rationing of credit.

“There has been a desire since the financial crisis on all of our parts to bring debts down – we got a bit of a

‘Having seen debt levels rise really since the Eighties, I would guess we are entering a phase of consolidation’

shock and we don’t want to find ourselves in that position again,” said Mr Jackson.

“Having seen debt levels rise really since the Eighties, I would guess we are entering a phase of consolidation in the developed world. We have got basically as much debt as we realistically felt comfortable with.”

However, this also has implications for global growth in future.

“We have to get used to the idea we are going to have lower growth. Partly because of the consolidation, debt is not going to be the driver [of the economy] that it has been over the past three or four decades,” Mr Jackson said.

It comes just as demographics worsen, so the reliance on a growing population to drive the economy will also decline.

“It comes down to what you can do with productivity – can you find some great new source of productivity growth?” said Mr Jackson.

Interest rates have been rising in the US since late 2015 and the UK is expected to follow suit this week.

Markets believe there is around a 90pc chance the Bank of England will increase its base rate from 0.5pc to 0.75pc on Thursday.

This will be the first move away from the emergency rates introduced in the financial crisis.

Mark Carney and his fellow Monetary Policy Committee members believe a small number of rate rises will be required over the next two to three years to bring inflation down to their 2pc target. However, some economists are concerned inflation is already on the way down and fear the hike will be a mistake.