The Economic Impact of Increasing Private Debt

Private debt which includes household and corporate debt, as a percentage of GDP is now higher in many countries than before the global financial crisis, with detrimental effects on real economy and acting as a precursor to a downturn in the economy. This paper seeks to explore the re-emergence of private debt and its impact on the real economy. For the purpose of analysis we have selected those economies that as per the World Bank data have private debt to GDP ratio higher than 100% as of 2014–15. We have further grouped these economies in to five groups-US, Asia Pacific, European Union, Australia and China. In order to examine the impact of growing levels of private debt as a percentage of GDP on growth rate in above mentioned economies, data series on private debt as a percentage of GDP and annual growth rate from the year 1980 to 2014 have been selected from the data base of World Bank. The methodology used to examine the relation between the two is Pearson's Correlation Coefficient. Except for China and Australia, the rest of the economies have significant negative correlation coefficients. This can be understood that over the period 1980 to 2014, in these economies high levels of private debt to GDP has been followed by lower annual GDP growth rates, after a lag of two years. To aim for stronger growth it thus is mandatory to hold the reins of private debt very tightly.