By Seth Carpenter, Chief Global Economist at Morgan Stanley
Running to Stand Still – Fiscal Deficits and Sovereign Debt
The issue of debt sustainability has been lurking in the shadows but is likely to come out of hiding soon. During Covid, the debt/GDP ratio for much of the DM world shot up. A victim of both the numerator and denominator, fiscal expansion pushed debt higher while GDP contracted. The recovery from the Covid recession brought a semblance of balance as rapid nominal GDP growth, boosted by the inflation surge, undid some of the denominator effect. As inflation cools and growth decelerates to trend, the numerator, or debt level, will come into focus.
