Lexicon Financial Group Weekly Update — February 19, 2025
“Millennials are concerned with national debt and the deficits.”
From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel
Looking Around
We can’t seem to stop talking about the impact of trade tariffs on economies and stock markets. But while everyone is distracted by that conversation, another important issue is lurking in the background that could have as big an impact, if not a bigger one. National debt.
The graphic above displays government debt by country, based on data from the IMF’s October 2024 World Economic Outlook, in 2024. At first glance, U.S. debt accounts for a significant amount of global government debt, but China and Japan have sizeable government debt as well. (1)
But that makes some sense – these are some of the world’s largest and most developed economies. What’s interesting to note is the percentage of their country’s debt when compared to their overall productivity, which is generally shown as the GDP or Gross Domestic Product. It’s shorthand for how much economic activity takes place in a country. Then the story shifts in meaningful ways.
Debt is problematic as borrowers (you, me, businesses, and governments) are required to pay interest to lenders. Too much debt, and most of our revenue will go to offset the interest charges instead of being spent on domestic programs. Notably, in 2024 the U.S. started paying more interest on its debt than it spends on its military.
Earlier this year, International Monetary Fund (IMF) Deputy Chief Gita Gopinath stated that it is not just that the world has now collectively accumulated about $100 trillion in public debt but that higher interest rates make paying it off far more expensive.
According to Gopinath, institutions tasked with forecasting largely failed to account for seismic events like financial crises or pandemics. So, debt ballooned and grew in ways that were not predicted. And, while some countries may be able to raise taxes to manage their debt, there is a limit to just how far they can go.
Heavy debt loads mean governments may have less money available for important forward-looking activities like investing in public services, modernizing infrastructure, or becoming more competitive globally through innovation or encouraging entrepreneurship. This is why interest rates are so important -- higher interest rates mean there is even less to invest. This is particularly devastating for less wealthy nations. According to United Nations (U.N.) Trade and Development Secretary-General Rebecca Grynspan, 3.3 billion people live in countries around the world that are spending more on servicing the debt than on education or health. This reduces economic growth and development. Take war-torn Sudan as an example. That country’s debt is over 3 times more than the economy generates in a given year.
Wealthier countries are not that much better off. Japan’s debt-to-GDP ratio has topped 200 per cent and the U.S. is headed for an unnerving ratio of 120 per cent. This level of debt means there’s less of a buffer to protect the country from negative events like a recession. Unnecessary trade friction, particularly with traditionally close trade partners, could exacerbate matters.
So why not bring in austerity measures, cut spending, and reduce debt? This seems to be the path being followed in the U.S. at the moment. But it isn’t quite that simple. History has shown that this is not popular with consumers, voters, or politicians for that matter. Another way to reduce the debt-to-GDP ratio is to focus on the other part of the equation: boost productivity and grow the economy. (2)
Growth is the secret sauce to achieving economic success. Why? Because it determines how much output we get from our inputs, and when it's high, living standards soar. However, productivity growth has been low globally in recent years, particularly in advanced economies.
The manufacturing sector, which used to be a productivity growth powerhouse, has lost its edge as the heyday of rapid productivity growth driven by technological advancements and offshoring of labor-intensive production has faded.
Investment in tangible capital (machines, equipment, and buildings) has been persistently low across various sectors. This has put a damper on productivity growth, as capital per worker plays a vital role in driving efficiency and innovation.
Some emerging economies have actually managed to make remarkable progress over the past 25 years. China and India have led the way, enabling more than one billion people to escape poverty. Growth is also reflected in the development paths of other high-productivity emerging economies (including Poland, Romania, Estonia, Lithuania, Vietnam, Bangladesh, Ethiopia, and Rwanda). Capital investment has increased, and urbanisation has spurred demand for construction and infrastructure development.
Generative AI could be another way for developed economies to boost productivity. There are studies to suggest that AI alone could account for 0.1 to 0.6 percent annual growth alone. To take advantage of this opportunity, governments and businesses will have to invest in digital infrastructure, promote digital literacy, and facilitate the integration of digital technologies across sectors. (3)
But a productive economy will require investment in new ideas and training for displaced workers. That might cost significant money. And put a further strain on government debt.
Read and Watch
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Looking Back
The S&P/TSX (TSX) composite index fell 0.8 per cent last Friday as weaker-than-expected retail sales data in the United States (U.S.) and mixed corporate earnings encouraged investors to pocket much of this week’s gains. Despite this, the TSX was still up 0.2 per cent for the week.
U.S. retail sales in January were weighed down by frigid temperatures, wildfires, and motor vehicle shortages, which possibly suggest a sharp slowdown in economic growth early in the first quarter of 2025. Canada sends about 75 per cent of its exports to the U.S. which is continuing to threaten to impose tariffs on its global trading partners. The threat of a trade war is causing Canadian investors to deal with the uncertainty by adjusting how their portfolios are constructed and where they are making investments. (4)
U.S. stock markets finished mostly up last week, with the Nasdaq Composite leading the way with a gain of more than 2 per cent. Growth stocks outperformed value shares for the second week this year while small-cap stocks lagged. Both the S&P 500 Index and Nasdaq Composite closed the week within 1 per cent of all-time highs. In fact, the markets had their best day of the week last Thursday thanks to the response to President Donald Trump’s decision to not introduce new global tariffs. Instead, he signed an order that—following further study— could lead to the implementation of reciprocal tariffs on a country-by-country basis by April 1, which, as we all know, is April Fools Day.
While testifying in front of the Senate Banking Committee, Federal Reserve (Fed) Chair Jerome Powell noted that the hotter-than-expected inflation data show that while the Fed has made significant progress on bringing down inflation, it is still not quite there yet, so it will keep interest rate policy restrictive for now. Current futures market expectations for the next interest rate cut have moved from September to December in the wake of this.
Last week the pan-European STOXX Europe 600 Index ended 1.78 per cent higher after reaching a fresh record level. Other major European stock markets also ended up last week. The hopes for an end to the Ukraine-Russia conflict and robust earnings reports appear to have lifted investor sentiment. The United Kingdom economy grew more than forecasted in 2024. The Bank of England is expected to remain cautious about cutting interest rates because of continuing strong pay growth.
Major stock markets in Japan rose last week due to the weakness of the yen and the boosting of investor sentiment by U.S. President Donald Trump’s decision to refrain from immediately imposing reciprocal tariffs on its trading partners. The current consensus is that the Bank of Japan (BoJ) is next likely to raise rates in the second half of this year. Rising inflation in Japan supports the case for further monetary policy by the BoJ.
Mainland Chinese stock markets rose, lifted by hopes that U.S. tariffs on Chinese imports may prove to be milder than expected following the Trump administration’s decision to impose a 10 per cent tariff on the country’s products in early February. China’s consumer price index rose by more than expected 0.5 per cent in January from a year ago. This increase marked the first pickup in consumer inflation since August last year and was most probably driven by a spending surge ahead of the eight-day Lunar New Year holiday. However, the producer price index fell 2.3 per cent in January, marking the 28th consecutive month of factory deflation. That’s worth keeping an eye on. A yearlong housing slump has prompted people to save rather than spend, which has frustrated the government’s attempts to boost consumer spending. (5)
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
Visualizing $102 Trillion of Global Debt in 2024, Dorothy Neufeld, Visual Capitalist, December 17, 2024
Soaring public debt is worrying experts at Davos 2025. Here's why most of us didn’t see it coming, John Letzig, Digital Editor, Economics, World Economic Forum, January 23, 2025
How Countries And Companies Can Rev Up The Productivity Engine, Kweilin Ellingrud, Forbes, August 24, 2024
TSX gives back much of weekly gain after mixed corporate earnings, The Globe And Mail, February 14, 2025
Global markets weekly update – U.S. inflation accelerates in January, T. Rowe Price, February 14, 2025
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Looking to Learn?
If you want to know more about some of the topics we wrote about this week, just click on the links below:
Global Public Debt Is Probably Worse Than it Looks
Video: Global Debt Just Hit $305 Trillion… (How That Affects You)
Global debt levels are on the rise. How worried should we be?