Macro Signposts | 24 June 2025

Please note that Macro Signposts will pause for a summer recess, resuming on July 15.

This week, I asked Peder Beck-Friis, economist, to guest author Macro Signposts and share insights into public debt in developed economies, along with implications for investors.

Developed Market Public Debt: A Long Road Ahead

By Peder Beck-Friis

Bond investors assess many factors when weighing portfolio decisions, and this year, global fiscal policy has drawn close scrutiny. On the surface, much seems to have changed: Germany has loosened its fiscal rules and on Tuesday set out an expansionary budget for the year ahead. Many European countries have announced plans to boost military spending; as of this writing, it appears likely NATO members (meeting this week at their annual summit) will commit to raising defense-related spending to 5% of GDP within a decade. In the U.S., the tax and spending bill advocated by the Trump administration is moving through Congress, and Moody's has joined the two other major rating agencies in downgrading the long-term U.S. credit rating. Markets have responded by pricing in higher term premiums on long-dated bonds, steepening the yield curve.

Uncertainty has increased, driving bouts of market volatility. Yet, the bigger picture for public debt remains much the same as last year (see our latest PM Chartbook for details). Deficits will likely stay above pre-pandemic levels, partly due to rising borrowing costs. And although fiscal policy in some countries may be less tight than expected a year ago, we do not expect a big fiscal splurge ahead. The fiscal outlook in the developed world looks broadly neutral - neither stimulative nor contractionary - and so is unlikely to be a major driver of global growth, unlike during the pandemic years.

Debt dynamics, meanwhile, still appear fragile in a few countries, perhaps more so than before. But these issues seem chronic, not acute - unlikely to trigger a sudden fiscal crisis. Instead, we expect episodic market volatility, possible further steepening of the yield curve, and governments to eventually address deficits via tighter fiscal policies.

Deficits on average hold steady
Fiscal deficits vary widely by country but, in aggregate across developed economies, look set to stay roughly flat in the coming years, barring a recession. Many recent easing measures simply offset earlier plans to tighten budgets. In countries with limited fiscal space, higher military spending will likely be balanced by cuts elsewhere or higher taxes; the U.K.'s recent cut to foreign aid to fund defense spending is a clear example. Many euro area countries have so far avoided borrowing more for military boosts, even though the European Commission has relaxed its fiscal rules to allow it.

Deficit dynamics and fiscal approaches vary across countries. The Trump administration's fiscal package (in whatever final form it takes after congressional wrangling) will likely keep the U.S. structural deficit around 6%-7% of GDP, roughly the same as it is today. In the euro area, the overall deficit will likely stay steady too. Germany looks set to ease, and its deficit may reach around 4% of GDP in the coming years. However, EU countries with tighter limits - including Italy, Spain, and France - are likely to tighten, and EU pandemic support will phase out. Elsewhere, Japan may ease fiscal policy slightly, but the U.K. appears set to tighten.

The long road of public debt
Near-term deficits may be stable, more or less, but government debt sustainability over the long run is more concerning - and investors are taking note. Government debt has been rising for decades, and many countries have been on an unsustainable path for years. The facts remain stark. Today, G7 government debt hovers near the peak levels seen after World War II, highlighting the dramatic scale of public borrowing.

Start with the good news: In most countries, debt is not a pressing concern. Most euro area countries, and also the Nordics, Australia, New Zealand, and Switzerland, have debt levels too low to threaten fiscal credibility. A few, like the U.K. and Italy, face a more fragile outlook, but their debt looks broadly sustainable if they follow through on planned fiscal tightening. Meanwhile, Japan's debt remains very high but is unlikely to rise much; Japan still borrows at low interest rates relative to GDP growth, making its debt easier to manage.

Three countries stand out - the U.S., France, and Belgium - where debt is on an ever-increasing path under current policies. All run large primary deficits - ignoring interest costs - and borrow at interest rates at or just above their normal growth rates, compounding the cost of servicing those deficits. And none plans to tighten policy meaningfully soon.

At some stage, however, policy or prices must adjust in order to temper the rising debt levels. The best case scenario is if growth picks up, expanding the tax base and stabilizing the debt ratio. A more disruptive scenario is if policymakers resort to high inflation to erode the nominal value of the debt stock.

Neither seems likely. Growth looks weak. For the U.S. to flatten its debt curve, trend growth would likely need to exceed 4% over time - unlikely even for AI optimists. Central banks might tolerate slightly higher inflation for a while but likely won't let inflation expectations rise much. After World War II, high inflation together with financial repression - anchoring yields artificially low - helped reduce debt. Today, central banks have stronger credibility, with long-term inflation expectations anchored near targets.

Instead, the most likely long-term fix is debt consolidation through spending cuts or higher taxes. This may seem unlikely now, but attitudes could change over time (perhaps beyond the next five years), especially if interest rates stay high or rise with a higher term premium. The U.K.'s experience after Prime Minister Liz Truss in 2022 - shifting to a tight fiscal outlook after a temporary spike in yields - serves as an example. But a policy pivot doesn't require a sudden jump in term premia. Over the last century, the U.S. often tightened policy when high rates constrained fiscal policy or growth. Interest payments now make up nearly 14% of U.S. fiscal spending and are rising fast. Previous times when interest costs hit similar levels were followed by fiscal consolidation: after WWII (with financial repression as well), under Reagan in the late 1980s, and under Clinton in the 1990s.

Market implications
With debt and deficits high, market volatility will likely continue. High deficits will keep bond issuance elevated in coming years, and when government debt climbs, investors tend to demand higher compensation to hold long-term bonds instead of cash or short-term bills.

With deficits already high, future downturns will likely push them to historically high levels. This may limit active fiscal easing during recessions, shifting more burden to central banks. Before the pandemic, when interest rates were low, fiscal space was ample and monetary policy space limited; now, when interest rates are higher, fiscal space is limited and monetary policy space ample. That makes front-end rates more attractive.

These trends raise the risk of steeper yield curves, and investors should consider positioning for this scenario. We also see value in global diversification: Different fiscal situations across countries create opportunities for relative value in global duration.

Catch up on recent editions of Macro Signposts:

Not yet subscribed? To receive Macro Signposts each week, please sign up here. Macro Signposts highlights weekly takeaways from the data analysis conducted by our team of economists and other macro experts. For PIMCO's official views on the global economy, please visit pimco.com.

We welcome your questions about the global macro landscape. Don't hesitate to suggest themes or data for us to analyze and discuss: Please email [email protected].

For regular insights on U.S. policy via email, please sign up here to receive PIMCO Washington Watch from Libby Cantrill, head of public policy.

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Equities may decline in value due to both real and perceived general market, economic and industry conditions.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517, 11 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. Since PIMCO Europe Ltd services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany) is authorized and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG). PIMCO Europe GmbH Italian Branch (Company No. 10005170963, Via Turati nn. 25/27 (angolo via Cavalieri n. 4) 20121 Milano, Italy), PIMCO Europe GmbH Irish Branch (Company No. 909462, 57B Harcourt Street Dublin D02 F721, Ireland), PIMCO Europe GmbH UK Branch (Company No. FC037712, 11 Baker Street, London W1U 3AH, UK), PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E, Paseo de la Castellana 43, Oficina 05-111, 28046 Madrid, Spain), PIMCO Europe GmbH French Branch (Company No. 918745621 R.C.S. Paris, 50-52 Boulevard Haussmann, 75009 Paris, France) and PIMCO Europe GmbH (DIFC Branch) (Company No. 9613, Unit GD-GB-00-15-BC-05-0, Level 15, Gate Building, Dubai International Financial Centre, United Arab Emirates) are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) (Giovanni Battista Martini, 3 - 00198 Rome) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland (New Wapping Street, North Wall Quay, Dublin 1 D01 F7X3) in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN); (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) (Edison, 4, 28006 Madrid) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively, (5) French Branch: ACPR/Banque de France (4 Place de Budapest, CS 92459, 75436 Paris Cedex 09) in accordance with Art. 35 of Directive 2014/65/EU on markets in financial instruments and under the surveillance of ACPR and AMF and (6) DIFC Branch: Regulated by the Dubai Financial Services Authority ("DFSA") (Level 13, West Wing, The Gate, DIFC) in accordance with Art. 48 of the Regulatory Law 2004. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. According to Art. 56 of Regulation (EU) 565/2017, an investment company is entitled to assume that professional clients possess the necessary knowledge and experience to understand the risks associated with the relevant investment services or transactions. Since PIMCO Europe GMBH services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2, Brandschenkestrasse 41 Zurich 8002, Switzerland). According to the Swiss Collective Investment Schemes Act of 23 June 2006 ("CISA"), an investment company is entitled to assume that professional clients possess the necessary knowledge and experience to understand the risks associated with the relevant investment services or transactions. Since PIMCO (Schweiz) GmbH services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser. PIMCO Asia Pte Ltd (8 Marina View, #30-01, Asia Square Tower 1, Singapore 018960, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited. Office address: Suite 7204, Shanghai Tower, 479 Lujiazui Ring Road, Pudong, Shanghai 200120, China (Unified social credit code: 91310115MA1K41MU72) is registered with Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other). | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. To the extent it involves Pacific Investment Management Co LLC (PIMCO LLC) providing financial services to wholesale clients, PIMCO LLC is exempt from the requirement to hold an Australian financial services licence in respect of financial services provided to wholesale clients in Australia. PIMCO LLC is regulated by the Securities and Exchange Commission under US laws, which differ from Australian laws. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association, The Investment Trusts Association, Japan and Type II Financial Instruments Firms Association. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is an independently operated and managed company. The reference number of business license of the company approved by the competent authority is (112) Jin Guan Tou Gu Xin Zi No. 015. The registered address of the company is 40F., No.68, Sec. 5, Zhongxiao East Rd., Xinyi District, Taipei City 110, Taiwan (R.O.C.), and the telephone number is +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | Note to Readers in Colombia: This document is provided through the representative office of Pacific Investment Management Company LLC located at Carrera 7 No. 71-52 TB Piso 9, Bogota D.C. (Promoción y oferta de los negocios y servicios del mercado de valores por parte de Pacific Investment Management Company LLC, representada en Colombia.). Note to Readers in Brazil: PIMCO Latin America Administradora de Carteiras Ltda.Av. Brg. Faria Lima, 3477 Itaim Bibi, São Paulo - SP 04538-132 Brazil. Note to Readers in Argentina: This document may be provided through the representative office of PIMCO Global Advisors LLC AVENIDA CORRIENTES, 299, Buenos Aires, Argentina. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2025, PIMCO.

CMR2025-0624-4609667