Global National Debt Hits Record High... Will Western-China Trade War Deepen It?

Global Debt Hits $315 Trillion in Q1 This Year
Up 2.6% Year-on-Year, Reaching Record High
Unprecedented Surge in Emerging Market Debt Highlighted
Impact of Prolonged US High Interest Rate Monetary Policy

Debt Expected to Rise Amid Protectionist Trends

Global national debt has reached an all-time high. This is the result of efforts by various countries to curb inflation, which intensified after COVID-19. The problem is that inflation is becoming entrenched, and with the escalation of trade wars centered around the West and China, there are concerns that global debt will continue to rise.

According to the International Institute of Finance (IIF) Global Debt Report on the 29th (local time), the size of global debt in the first quarter of this year reached $315.1 trillion (approximately 43 quadrillion won), an increase of about 2.6% compared to the same period last year. This is the highest ever recorded. The global debt-to-GDP ratio reversed to an upward trend after four quarters.

In particular, the debt increase in emerging countries such as China, India, and Mexico was notable. In the first quarter of this year, it rose about 4.3% year-on-year to $105.4 trillion. The IIF stated, “The debt size of these emerging markets was only $55 trillion ten years ago, but debt is increasing at an unprecedented pace.”

Analysis suggests that the U.S. phenomena of ‘sticky inflation’ and the ‘king dollar’ are major factors driving the increase in global debt. Persistent inflation is leading to expectations that the U.S. Federal Reserve (Fed) will maintain high interest rates for a longer period, which strengthens the dollar and increases the debt burden on emerging countries.

The IIF analyzed that since Europe is expected to start lowering interest rates later than the U.S., another dollar rally could occur. In this case, the government debt burden of developing countries is expected to become more pronounced.

Of the total $315 trillion debt, about two-thirds is held by advanced countries such as the U.S. and Japan. The IIF highlighted that Japan’s debt-to-GDP ratio exceeds 600%, emphasizing that it carries the largest debt in the world. This is a 60 percentage point increase compared to before the COVID-19 pandemic. The IIF analyzed that the weak yen phenomenon is related to the rapid increase in debt, given that Japan’s financial institutions and government sectors hold a significant amount of overseas assets. It also added that despite Japan raising interest rates for the first time in 17 years, the yen’s weakness continues, which could negatively impact household debt.

The IIF also pointed out that signs of a trade war centered on the U.S. and Europe versus China are a significant headwind for the global debt market. Global trade flows have shifted toward protectionism. China aims to serve as the ‘world’s factory’ across all industrial sectors including electric vehicles, semiconductors, and raw materials, while the West is increasing tariffs to block Chinese products and protect its own industries, intensifying conflicts.

As a result, global value chains are restricted, inflation remains persistent, and consequently, the benchmark interest rates of countries worldwide are likely to remain at high levels, raising concerns that this could lead to a surge in debt.