McKinsey Global Institute’s has published an update to its January 2010 study entitled ‘Debt and deleveraging: The global credit bubble and its economic consequences’. The update reveals a startling fact: Britain’s total debt, that is, private, public and financial sector debt, is the highest in the world, far exceeding that of the eurozone countries being bailed out.
Over the past decade our total debt (the orange line on the chart below) has grown more rapidly than that of any other nation. The UK now sits just above Japan and far above Spain in third place.
Over the past twenty years our debt burden has gone from about average for a developed economy to top of the leader board. Historically such a huge build up of debt is followed by a prolonged period of deleveraging. This deleveraging typically sees consumers and businesses reduce spending in order to pay down debt – a process that puts a big drain on economic growth.
The McKinsey study looks at 45 historical examples of such deleveraging and finds that it typically lasts for six or seven years and ultimately reduces a nation’s debt to GDP by around 25%. In the case of the UK this would be equivalent to an entire year’s GDP and it’s a process that hasn’t yet begun.