For households, the increase in the debt ratio has been driven in part by the decline in GDP. Households often take on more debt soon after facing income loss. But, in past downturns, households have soon adjusted to more conservative spending patterns, slowing down debt growth. Based on those experiences, we forecast that, after some incremental improvements next year, the global household debt-to-GDP ratio will stabilize around 66% at the end of 2023.
Of course, the shape of the post-pandemic recovery will affect how much and how quickly these three groups of borrowers can trim debt. In many cases, debt ratios will flatten only as a result of a GDP recovery, rather than a decrease in debt. And several factors – including additional waves of COVID-19, a delayed vaccine, increased interest rates, a sustained dramatic widening of credit spreads, continued debt growth, or a disappointing rebound in demand – could turn the recession into a W-shaped one.
Even if the recovery unfolds as expected, there will be no shortage of economic pain. Some sectors are running well below capacity, straining firms’ survival prospects and, by extension, employment and credit outcomes. As a result, the short-term outlook remains worrying, particularly for borrowers at the lower end of the credit scale or in vulnerable industries. Nonetheless, we can take some comfort from the analysis that a large-scale debt crisis may not be nearly as likely as many fear.
Terry Chan is senior research fellow of Credit Research for the Asia-Pacific at S&P Global Ratings.
Alexandra Dimitrijevic is global head of research at S&P Global Ratings.