Wednesday, August 1, 2012

1/8/2012: Some interesting notes on Debt and Growth

Some interesting long-term relations between Government debt and economic growth. No comment, but few stats and charts:

First - levels of debt and levels of growth:

Weak, negative relationship above.

Now, rates of change in debt y/y and growth:

Much stronger negative relationship above. Of course, we would expect that negative growth would lead to growth in debt/GDP ratio due to stimuli and due to simple fact of shrinking GDP.

Here's the matrix of average rates:

What do we have?

  • Both debt and economy expanding (pro-cyclical expansion): 144 episodes in 1980-2012 period, debt growth on average is 3.172%pa against GDP growth on average of 2.086%pa.
  • Recession counter-cyclical growth in debt against contracting GDP: 43 episodes, average growth rate in debt 8.847% and average growth rate in GDP is -2.389%. 
  • Countercyclical contraction in debt during economic growth periods: 123 episodes, with average contraction in debt of -2.582% and corresponding (accompanying) expansion in the GDP of 3.782%
So conclusions: during expansions, debt shrinks, but by less than economy grows. During contractions, debt expands but by more than the decline rate in the economy. Worse than that - pro-cyclicality dominates counter-cyclicality. There are more episodes when debt grows during economic expansion than when debt grows during economic contractions. The average rates of debt expansion during economic expansion are greater than the average debt contraction rate during economic expansions. The gap is on average annually of ca 0.6% of GDP in terms of debt growth exceeding debt contraction during episodes of economic growth.

It is worth to note that EA12 are not unique by a significant margin when compared to Advanced economies sample:


Anonymous said...

As a negative happens in both scenarios, does that not imply something is not being included? Political influence maybe?

Dave said...

Whatever little growth we will witness in the next few years will only be due to an increase in mortgage defaults, as people will stop giving away their hard earned money to a dead bank and spend more in the shops.