Even as a new administration takes over in the US under the presidency of Trump and as most advanced economies look forward with plans to boost growth in 2025, the year has actually begun on a sombre note for many of them. That’s because their high fiscal deficits and high levels of debt are causing concern to creditors who are demanding higher interest rates for lending to them. In the case of the US, the fiscal deficit might even rise slightly through 2025 if Trump goes ahead with his plan to extend and deepen the 2017 tax cuts which are otherwise meant to expire this year.
But it’s not just the US. Britain, France and some other advanced economies in Europe are faced with similar pressures to rein in their fiscal deficit and debt, as I have written before on my blog, having spent big during the Covid years and also attempting to boost growth afterwards. In fact, many of these economies, especially UK and those in Europe were also dealing with an energy crisis after Russia attacked Ukraine in 2022. As a result, many of their plans to invest in renewables and in the clean energy transition has taken a back seat and slowed down.
What makes matters worse for many of these advanced economies is that they will probably be constrained in raising taxes in 2025 in order to reduce the fiscal deficit which means extra borrowing of course, adding to the already huge debt pile. This is because inflation is still at elevated levels across most advanced economies, and households will expect governments to go easy on taxes. Meanwhile, companies will demand keeping taxes low arguing that it would encourage them to invest. The truth is that low corporate taxes in most of these countries are meant more to attract overseas companies to invest than for those already operating there.
What’s most important is how much of this debt pile comes up for repayment this year, as this needs to be prioritized, in order to avoid a debt default. A default is the last thing any economy needs right now, as economic recovery is still fragile, inflation is still high and a default would only send shock waves throughout the international financial system and scuttle what little chances of economic growth there are. According to the IIF (International Institute of Finance) cited in this Reuters article, global debt has reached almost US $323 trillion, with borrowing costs rising fastest in advanced economies. Of this, IIF expects sovereign debt to rise by a third between 2025 and 2028 to US$ 130 trillion.
That doesn’t mean emerging economies are safe from spiralling debt. The same article mentions that debt in emerging economies is US$ 105 trillion and is likely to touch 245% of GDP. Not all of the debt is sovereign, of course, but governments and central banks need to be watchful anyway. According to S&P Global, nearly US $7.6 trillion investment grade debt (BBB+ or higher) is coming due in 2025-2028, largely because financial institutions have been issuing more short-term debt of one to three year maturities. S&P Global expect global corporate debt issuance of the investment grade variety to be high in 2025, while that of speculative grade investment (BB+ or lower) issuance to be lower, with many companies seeking the M&A route to manage debt.
The year has also begun with foreign investors pulling out of emerging markets, including India which has seen US$ 11 billion leave in the September 2024 quarter and another US$ 4 billion leave in the month of December 2024 alone, according to this Reuters article. I assume most of it is money returning to the US, where the US dollar continues to strengthen. As a result, the Indian rupee lost value at a faster pace in the last couple of months of 2024, and many analysts expect it to be 88 to a dollar soon. And while the Indian currency might have depreciated less than other emerging market currencies, according to this article from The Economic Times, the RBI has used US$ 100 billion of its foreign reserves so far stabilising the Indian rupee. The weakening Indian rupee also puts immense pressure on our import bills as well as external debt repayment. Even after the corrigendum on gold imports which touched record levels last year was issued, India’s gold import bill is still at very high levels.
Otherwise, the Indian economy is in better fiscal condition although our debt levels need to be pared down faster. The Union Budget on February 1, 2025 will indicate the extent to which government borrowing will increase over the previous year if at all, in a year when everyone is expecting India’s private sector to raise its investment levels and improve salaries and wages in order to boost consumption.
Rising bond yields and rising gold prices together are never a good sign from an economic point of view as it usually suggests a rush to safe haven investment. And while 2025 might have begun on this sombre and cautious note, if there is any optimism to be found this year many market commentators believe that it is in equity markets. So far, that does not seem to be true either, as jitters over Trump policies, geopolitics as well as persistent inflation have followed us into the New Year.
That said, it is still early days. And all eyes ought to be on corporate earnings and what they tell us about the state of the economy and the consumer.
The animated owl gif that forms the featured image and title of the Owleye column is by animatedimages.org and I am thankful to them.
Peripatetic Perch 