Rising Debt, Shifting Markets: A Look at G7 Fiscal Trends through 2029

As global economies face fluctuating growth and rising inflation, government debt levels are under greater scrutiny than ever. Investors are keenly watching debt trends across major economies, particularly in the G7 countries, as debt burdens can significantly impact national fiscal policies, economic growth, and market dynamics.

General government gross debt

Source: IMF

U.S. Debt Outlook: A Growing Burden

Among the G7 countries, the U.S. is expected to see the largest increase in government debt over the next five years. The IMF projects that U.S. gross government debt will rise by nearly 11 percentage points, from 2024 to 2029. In 2023, U.S. debt had already surpassed US$33 trillion and reached a record US$35 trillion by mid-2024.

This sharp rise in U.S. debt comes at a time when the Federal Reserve has reduced its benchmark interest rate to a range of 4.75% to 5%. While this cut, implemented on September 18, 2024, will lower borrowing costs on short-term debt, the U.S. government’s debt burden is still projected to grow significantly. The lower federal funds rate is expected to decrease yields on Treasury bills and other short-term government securities, which could offer some relief by reducing debt-servicing costs on new debt issuance. However, the sheer scale of the U.S. debt load remains a concern.

Despite these rising debt levels, the U.S. is in a unique position compared to its G7 peers. As the issuer of the world’s primary reserve currency, the U.S. dollar, the country has more flexibility in managing its debt. This “exorbitant privilege” allows the U.S. to sustain higher debt levels while continuing to attract global investors who view U.S. Treasury securities as safe, liquid assets.

Japan: The Highest Debt Load, But Slowing Growth

Japan continues to hold the title for the highest debt-to-GDP ratio among the G7 countries. In 2024, Japan’s debt is projected to reach 254.6% of GDP. However, unlike the U.S., Japan is expected to see a slight decline in its debt-to-GDP ratio over the next five years. By 2029, Japan’s ratio is forecast to fall to 251.7%, though this still represents an enormous debt burden.

Several factors contribute to Japan’s elevated debt levels, including economic stagnation, an aging population, and natural disasters. Japan’s slow growth and high debt levels present long-term challenges, but the country has a stable bond market, with the majority of its debt held domestically. This makes Japan less vulnerable to external shocks compared to other nations with high levels of foreign-held debt.

Canada and Germany: Reducing Debt Amid Global Uncertainty

While the U.S. and Japan are on divergent paths regarding their debt-to-GDP ratios, Canada and Germany are set to reduce their debt levels significantly over the next five years. Canada, in particular, is expected to see the largest reduction in its debt-to-GDP ratio, with a projected decline of nearly 10 percentage points by 2029. This reduction will place Canada among the more fiscally responsible G7 nations, giving it greater flexibility to navigate future economic challenges.

Germany, long known for its prudent fiscal policies, is also projected to reduce its debt, with a forecasted debt-to-GDP ratio of just 58% by 2029. Germany’s strong economic fundamentals, including a robust manufacturing sector and export-driven economy, provide it with a stable base from which to manage its debt. 

Other G7 Nations: France, Italy, and the U.K.

France, Italy, and the U.K. fall somewhere between the U.S. and Japan in terms of their debt trajectories. Each of these countries faces unique economic challenges, including political instability, aging populations, and slower economic growth. While these nations are not expected to see dramatic increases in their debt-to-GDP ratios, their fiscal positions remain a key concern for investors, particularly as global markets grow more volatile.

Global Fundraising and Asia’s Role in the Debt Markets

Looking beyond the G7, global private equity fundraising for secondary funds reached US$118 billion in 2023. However, only a small portion, around 5-10%, of this capital is currently allocated to Asia. This indicates a growth opportunity for Asian markets, as both private and public debt levels in the region are expected to rise over the coming years.

With a growing reserve of capital, referred to as dry powder, available for deployment in global markets, the private equity sector is poised to play an increasingly important role in managing government and corporate debt, both in G7 countries and across emerging markets.

The U.S. Dollar: Global Dominance Amid Debt Concerns

Despite the rising U.S. debt burden, the country remains the world’s foremost superpower, buoyed by its dominance in global financial markets and the U.S. dollar’s central role in the global economy. Today, the U.S. dollar is involved in 85-90% of global foreign currency exchange trades, and it accounts for 59% of foreign exchange reserves. Furthermore, U.S. stock market capitalization represents 61% of the global total.

This dominance allows the U.S. to sustain higher debt levels than most other nations, as international investors continue to seek U.S. dollar-denominated assets. However, this reliance on the dollar’s reserve currency status is not without risks. Should global sentiment shift, the U.S. could face increased borrowing costs, which would further exacerbate its debt challenges.

Conclusion: What Investors Should Watch For

For investors, the projected growth in government debt across G7 countries underscores the importance of monitoring fiscal policies and economic indicators closely. While the U.S. and Japan are expected to maintain high debt levels, Canada and Germany offer examples of more fiscally conservative approaches that may be better suited to weather global economic uncertainties.

The rise of secondary markets, particularly in Asia, also presents opportunities for investors seeking to diversify their portfolios and gain exposure to emerging markets. As governments and central banks continue to manage debt through a combination of monetary policy and fiscal measures, understanding the evolving landscape of global debt will be essential for making informed investment decisions.

Investors should keep an eye on how rising debt levels impact inflation, interest rates, and overall economic stability. For now, the U.S. dollar’s dominance provides a cushion for the world’s largest economy, but the future trajectory of global debt will be a key factor in shaping market opportunities over the next five years.