Debt/GDP Ratio
- The Debt/GDP ratio measures a country's total public debt as a percentage of its economic output, with the current US ratio at 123.36%
- Historically significant, the ratio peaked at 135.94% in 2020, with economists suggesting ratios above 77% can lead to lower GDP growth
- High debt ratios become problematic when combined with factors like current account deficits, currency instability, or inflation, though the US benefits from the dollar's reserve currency status
- While not directly correlated with stock prices, the ratio serves as an important risk indicator for investors, particularly when considering a country's economic sustainability
5 min read | Invest
As of December 2024, the US debt-to-GDP ratio is at around 124% (compared with the ratio of 123.1% in the previous quarter). This means the total national debt is about 124% of the country's Gross Domestic Product. Specifically, the US government debt is reported to be $36.216 trillion, while the GDP is $28.83 trillion.
But let's explain what the debt-to-GDP ratio is, how it works, and how to calculate it.
Description
The debt-to-GDP ratio shows a country’s total public debt as a percentage of GDP. The ratio gives an indication of how manageable a country’s debt is given its economic output.
Formula
The formula to calculate the debt-to-GDP ratio is calculated by dividing the total public debt at the end of a 12-month period by the GDP during the same period:
Effect
The debt-to-GDP ratio gives investors information about the investment risk of a country. If a country's debt becomes unsustainable, the economy and financial system can face risks.
Limitations
There isn't a direct ratio between the debt/GDP ratio and stock prices. But it can highlight risks, especially when a country has weak economic indicators and a high debt/GDP ratio.
What is the Debt-to-GDP ratio?
The debt / GDP ratio is an economic indicator that reflects a country’s total public debt as a percentage of GDP. The ratio indicates how manageable a country’s debt is given its economic output.
Public debt includes all government borrowing, while GDP includes personal consumption, business investment, government spending, and net exports. The term ‘debt-to-GDP’ is typically used to refer to public (government debt) as a percentage of GDP. However, it may also refer to a country’s total debt, which includes public, private, and corporate debt.
The basic premise behind the debt-to-GDP ratio is that a country’s ability to pay off its debt increases as its GDP increases. This occurs as tax revenues typically increase in line with economic activity. If debt rises faster than GDP, the interest on those debts will consume more tax revenue, leaving less for other spending. Ultimately, this will act as a drag on GDP growth, and eventually, the government may not repay the debt.
How to calculate the debt-to-GDP ratio?
The debt-to-GDP ratio is calculated by dividing a country’s total public debt at the end of a 12-month period by its GDP during that period. It is typically expressed as a percentage.
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What is the current US debt-to-GDP ratio?
In the fourth quarter of 2024, the US Debt / GDP ratio was 124%.
Key US debt / GDP ratio trends and levels
US government debt as a percentage of GDP has changed significantly over the last 100 years, though it’s important to remember the economy and financial system have also changed considerably.
US Debt as a percentage of GDP has increased steadily since 1981. The increases have typically begun during recessions, but continued to rise after the recessions have ended. Significant increases began during the global financial crisis in 2008, and the Covid-19 pandemic in 2020.
The ratio reached a record high of 135.94% during the second quarter of 2020.
While the ratio has declined slightly since 2020, there is no sign that it will fall meaningfully in the future.
How to use the debt-to-GDP ratio?
There isn’t a direct relationship between a country’s debt-to-GDP ratio and its stock market, but it is something to be aware of. A high debt-to-GDP ratio can be a problem if it becomes unsustainable, and high levels of debt can impact economic growth.
Risks of high debt-to-GDP ratios
If a country’s debt becomes unsustainable, its economy and financial system can face several risks:
Debt service levels (the interest that needs to be paid on the debt) increase along with debt. This money needs to be diverted from other fiscal programs like infrastructure investment. The World Bank believes that a ratio above 77% leads to lower GDP growth. Debt service levels also depend on interest rates, so a country can service more debt when interest rates are low.
Default risk increases when debt levels are high. As a country takes on more debt, the probability that it cannot repay its creditors increases. As the risk of default rises, so does the cost of further borrowing.
If a country’s debt becomes unsustainable, its financial markets are at risk of ‘capital flight’. This happens when investors sell a country’s bonds, currency, and equities to avoid the fallout from a default.
When a country faces a debt crisis, it will often be forced to reduce spending and make structural reforms. These are likely to constrain the economy until debt becomes manageable again.
When does debt become a problem?
High levels of debt can be manageable if a country’s currency and financial system remain stable and interest rates remain relatively low. Japan’s national debt has remained above 100% since 2000 and above 200% since 2012. Japan has sustained this level of debt because interest rates are very low, and the financial system is relatively stable. However, high levels of debt can lead to stagflation (low growth and high inflation) if the debt weighs on economic growth.
Debt is most likely to become an issue for countries when it is combined with a current account deficit, a weak or volatile currency, inflation and political instability. The risk is even higher when a country’s debt is denominated in a foreign currency. These risk factors are more common amongst developing economies.
High levels of debt can also be a problem for European Union member countries as they don’t have control over the currency and interest rates. This led to Greece’s sovereign debt crisis in 2009.
US debt and the stock market
The US is in a unique position in that the US Dollar is the global trading and reserve currency and US bonds are safe haven assets. This means the currency has remained strong and interest rates have fallen. This has allowed the US to carry a relatively high level of debt.
The high debt to GDP ratio in the US has not been viewed as a problem yet – but it may become a risk in the future. The risk would increase if the currency and bond market fell out of favor with global investors. If it becomes apparent that US debt has become unsustainable, it would likely affect the stock market significantly.
There is one important lesson that stock market investors can draw from the high US debt-to-GDP ratio. The US government has always been prepared to use very large amounts of debt during a recession or financial crisis. Debt has typically increased dramatically during a recession and has been used to provide liquidity and to support asset prices.
As always, we recommend referring to a variety of indicators and not relying on a single indicator. Useful indicators include:
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