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2 Deleveraging, What Deleveraging
1.1). At the same time, in a poisonous combination, world growth and inflation
are also lower than previously expected, also – though not only – as a legacy
of the past crisis. Deleveraging and slower nominal growth are in many cases
interacting in a vicious loop, with the latter making the deleveraging process
harder and the former exacerbating the economic slowdown. Moreover, the
global capacity to take on debt has been reduced through the combination of
slower expansion in real output and lower inflation.
Figure 1.1
World debt
215
210
205
200
195
190
185
180
175
170
165
160
World total debt ex-financials (% of GDP)
01 02 03 04 05 06 07 08 09 10 11 12 13
Source: Authors’ calculation based on OECD, IMF and national accounts data. See Data Appendix at the
end of the report.
Debt capacity in the years to come will depend on future dynamics of output
growth, inflation and real interest rates. We argue that potential output growth
in developed economies has been on a declining path since the 1980s and that
the crisis has caused a further, permanent decline in both the level and growth
rate of output. Moreover, we observe that output growth has been slowing since
2008 also in emerging markets, most prominently China. In this context, the
equilibrium real interest rate – that is, the interest rate compatible with full
employment – is also poised to stay at historical low levels and debt capacity will
be under pressure if the actual real rate settles above its equilibrium level. This is
likely to be the case in jurisdictions subject to the combined pressure of declining
inflation and the zero lower bound constraint. Additional concerns come from
possible increases in risk premia in those countries with a high level of legacy
debt.
Further insight is provided by Figures 1.2 and 1.3, which show the composition
of financial assets for developed markets and emerging markets. 1 The data
show that debt-type instruments dwarf equity-type instruments (stock market
capitalisation). Moreover, the figures illustrate that the sectoral composition of
debt and the relative roles of bank loans versus bonds vary across time and groups.
1 These charts focus on the value of financial assets in current dollars at current exchange rates.