Liabilities: Expected restraint

The rise in interest rates had a clear impact on the liabilities side of private households' balance sheets in 2023: After the already strong dampener in 2022, the growth in private debt weakened further to +4.1% worldwide; this represents the lowest growth in nine years (Figure 13). Overall, the global liabilities of private households amounted to EUR56.8trn at the end of 2023.

The decline in debt growth was observed in almost all regions in 2023. It was particularly pronounced in Western Europe and North America, where growth more than halved (Figure 14). Latin American households also hit the debt brake relatively hard. However, their Eastern European counterparts did not: at 14.4%, they recorded by far the highest increase in liabilities in 2023. However, this development is put into perspective against the backdrop of hyperinflation in Türkiye. In this respect, another phenomenon in the region – debt growth in 2023 was above the long-term trend – should also be viewed with caution. This phenomenon can otherwise only be observed in Japan, albeit as a positive development: after years of deflation and some strong debt reduction, private debt is also (slightly) increasing again in the face of higher inflation – good news for consumption and therefore Japan's prospects of escaping the deflationary spiral. In the rest of Asia, growth in 2023 and the trend are roughly on a par. In most other markets, however, current debt growth is well below the average of the last 20 years. Nowhere is this more true than in China, where private debt has grown by an average of almost 20% year on year. Together with the previous year, 2023 represents by far the lowest growth recorded to date. If any further proof were needed that China's real estate market is in a precarious state, it can also be found in this dramatic slowdown in debt growth. The slight increase in 2023 is likely to be little consolation here; it does not yet signal a turnaround.

Figure 13: Expected restraint

Global private liabilities in 2023 trn EUR and annual change, in %

Source: Allianz Research

Figure 14: Emergency brake in China

Increase of private debt by region, in %

Source: Allianz Research

De-Westernization

Given the large discrepancies in long-term debt growth between advanced economies and emerging economies, it is hardly surprising that there have been significant shifts on the global debt map over the last two decades. In contrast to financial assets, North America's position has also “deteriorated” (Figure 15). Whereas 20 years ago, 45.4% of all private liabilities were on the books in North America, this figure was “only” 36.4% at the end of 2023. Western Europe and Japan are experiencing equally sharp declines. In fact, these three regions still accounted for 90% of all global debt 20 years ago, compared to just under 65% today. The figure for financial assets is just under 73%. This is mirrored by the development in Asia and especially in China: its share of the global debt mountain has literally exploded from 1.4% to 18% – despite the weak development in the last two years. Chinese households now account for more than half of all private debt in Asia (including Japan).

Figure 15: De-Westernization

Private liabilities, regional split 2003 and 2023 (in 2023 EUR, in %)

Source: Allianz Research

Despite the rapid growth dynamics and shifts on the world debt map, the debt burden that households in the emerging markets have to shoulder is of course only a fraction of that incurred by households in industrialized countries: the latter exceeds the former by a factor of 12 (Figure 16). The three countries with the highest liabilities per capita worldwide are Switzerland (EUR127,470), Norway (EUR77,980) and Australia (EUR72,480). In the group of emerging economies, China is already in third place; only Chile (EUR7,330) and Malaysia (EUR8,820) had higher debt per capita at the end of 2022.

Figure 16: Still a world apart

Private liabilities per capita 2023, in EUR

Source: Allianz Research

There are again major differences between the regions. Stability characterizes the development in advanced economies such as North America, Japan and Western Europe.

No global private debt problem

More interesting than the absolute level of debt is, of course, the relation to economic output – because this indicator is ultimately decisive for debt sustainability and therefore the question of whether or not a debt crisis is imminent. And here the development – at least on a global level – does not look dramatic, on the contrary. As nominal growth in global economic activity remained at a high level (+6.5%) in 2023, the global debt ratio (liabilities as a percentage of GDP) fell for the third year in a row, dropping by 1.5 pps to 65.4% (Figure 17). This means that the global debt ratio was also more than 3 percentage points lower than in 2003 – a remarkable stability that masks a sharp rise in the run-up to the global financial crisis, but still hardly fits the widespread narrative of a world drowning in debt; at least this is not the case for private households as a whole.

However, there are again major differences between the regions. First and foremost, stability characterizes the development in advanced economies such as North America, Japan and Western Europe. In the first two regions, there has even been a sharp decline (-8.4pps and -6.9pps respectively), while the rate in Western Europe has risen by just 1.3pp; at 69.0%, however, it is still (just) below the levels in Japan (70.1%) and North America (77.2%). The exception among the industrialized countries is Australia/New Zealand, where the debt ratio rose by 19pps to 111%. However, this figure is still below the previous high of 122%, which was reached in 2020.

In the majority of emerging markets, on the other hand, the debt ratio has risen sharply over the last two decades. At the top of the list is China, where the ratio has almost quadrupled to a good 64%; in the other emerging market regions of Latin America and Eastern Europe, it has “only” doubled and still at a relatively moderate level. A word on the rest of Asia, whose relative stability (+7.2pp) is perhaps somewhat surprising in this context. However, this is primarily a statistical phenomenon: over the years, the weight of the poorer and even less indebted countries has increased, which has dampened the regional increase; in addition, there has been a sharp decline in Singapore. The picture is different at country level: In many countries such as India, the Philippines and Vietnam, debt has risen rapidly in relation to economic output. In Vietnam, it is already above the 50% threshold at 53.1%, while in India (47.0%) it is only just below. The private debt ratio in a dozen countries worldwide is now higher than that of the USA. These include not only rich countries such as Switzerland, Denmark and Australia, but also South Korea (103.6%), Taiwan (93.5%), Thailand (91.3%) and Malaysia (80.9%). Bottom line: even if there is no threat of a global debt crisis on the part of households, this does not apply to all countries. In some Asian emerging economies in particular, the debt dynamics of recent years give cause for concern.

Figure 17: No global private debt problem

Private liabilities as % of nominal GDP, by regions

Source: Allianz Research

A truly good year for all

Relatively strong growth in assets and relatively weak growth in liabilities led to a significant increase in net financial assets (financial assets less liabilities) in 2023: The +8.8% increase more than made up for the previous year's losses. Overall, global net financial assets amounted to EUR182trn at the end of 2023; this represents an increase of almost EUR15trn compared to the previous year and is also EUR4trn above the previous record value from 2021.

The development in the individual regions was almost synchronized: Strong growth was achieved everywhere, even in Japan, where the growth rate of +6.2% was well above the long-term trend (Figure 18). It is also striking that North America achieved the strongest growth, beaten only by Eastern Europe (for the reasons already mentioned). This strong development resulted in North America's share of global net financial assets reaching 51.2% in 2023; i.e. every second euro (less debt) was in the hands of North American households.

The development in the individual regions was almost synchronized: strong growth was achieved everywhere.

Figure 18: A truly good year for all

Net financial assets, CAGR 2003-2023 and growth 2023 / 2022, in %

Source: Allianz Research

Once again, it is worth adjusting these data for population growth and, above all, inflation (Figure 19). At first glance, the picture is very similar to that of gross financial assets. China is the undisputed leader, with net per capita financial assets, adjusted for purchasing power, having increased more than sevenfold in the last two decades. No other region can keep up here, not even the other emerging market regions, where a doubling can be observed. Among the advanced economies, it is noticeable that Western Europe is once again lagging behind Japan, with the gap of just under 0.4pps being even more pronounced than in the case of gross financial assets.

Figure 19: China remains on top – by a wide margin

Net financial assets per capita, nominal and real CAGR 2003-2023, in %

Source: Allianz Research

What does the comparison of the development of gross and net financial assets show? A clear pattern can be seen here: In the emerging economies, real net financial assets have in some cases grown significantly slower than real gross financial assets in recent years; in China, for example, the gap amounted to 1.5pp per year. This growth gap implies that, on average, debt has grown faster than assets in these countries. In the advanced economies, the opposite is true: debt is growing more slowly and net financial assets are therefore growing faster than gross financial assets. This is particularly true of Japan (Figure 20). A word on Western Europe, where the growth advantage of gross financial assets is lower than in Japan, but also in North America. This is due to the great heterogeneity of the Old Continent in dealing with private liabilities: on the one hand, there are countries such as Ireland (+1.3pp), Spain (+0.8pp) and Portugal (+0.8pp), which had to massively reduce liabilities after the euro crisis; Germany (+1.0pp) and the Netherlands (+0.3pp) also belong to this group. On the other hand, countries such as Finland (-1.3p), Greece (-0.8p) and Belgium (-0.6p) have seen their debt grow faster than their assets on average over the last 20 years.

Figure 20: Debt restraint in advanced economies

Difference of per capita net and gross financial assets' real CAGR 2003-2023, in pp

Source: Allianz Research

Where is the development of net financial assets heading? Figure 21, the ranking of the richest 25 countries by per capita net financial assets at the end of 2023, provides some insight. It no longer shows Switzerland in first place, but the US. This is due to the high per capita debt in Switzerland (EUR127,470), which is more than twice as high as in the USA (EUR54,610). There are also changes in the other places. For example, Italy (+5) and New Zealand (+4) performed significantly better; Spain (+3) also improved significantly. On the other hand, Norway (-9) plummeted; the decline in the Netherlands and Canada (-3 each) was not quite as dramatic.