Has The World Reached Its Credit Limit?

• Post-crisis global growth rates have been lackluster, but credit levels are at all-time highs.
• The majority of new credit creation in recent years has occurred in emerging markets.
• Stalling capital inflows into emerging markets could continue to weigh on global growth.

In a new report, Citi Research analyst Matt King looked at exploding global credit levels, why weakness on emerging markets is having such a large impact on equity markets and exactly where the world stands at this point. According to King, the deleveraging process could potentially be a painful one for global economies.

Growth/Debt Disconnect

Since the Financial Crisis in 2008, global economic growth has been lackluster. Growth levels in the United States, Europe and emerging markets have failed to approach pre-crisis levels. However, global credit levels have never been higher.

The global credit level is currently approaching $9 trillion, despite the fact that global GDP growth levels are not back to pre-crisis highs.

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Where Is The Credit Being Created?

King explained that $8 trillion of capital has flowed into emerging markets since 2000. While developed market credit is nowhere near its pre-crisis levels, emerging market credit has reached unprecedented levels in the past couple of years.

However, this emerging market credit is different from developed market credit in that the majority of it originates with banks. In that sense, it is more “money-like” and is more likely to be invested than credit created in developed markets.

What’s Next?

According to King, capital flows to emerging markets are now stalling, and global GDP growth rates will suffer the consequences. Despite exploding balance sheets, central markets have struggled to stimulate private sector non-financial credit in recent decades. “Credit growth requires willing borrowers as well as lenders; we may be nearing the limits for both,” King concluded.

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