- Debt growth accelerates further to 6.0% in 2017
- Eight years after the crisis, global deleveraging process has ended
- Household debt still poses no risk in most – but not all – countries
Worldwide private household liabilities reached a historic high of EUR 39.8 trillion in 2017.
At 6.0%, the growth rate was not only slightly above the previous year's level of 5.5%, but also well above the long-term average annual growth rate of 3.9%.
Debt growth has accelerated noticeably since 2013 and is gradually returning to levels seen before the financial crisis.
Low interest rates make borrowing more attractive while loan volumes have increased, particularly in the case of mortgages, in line with developments in house prices.
According to the Organization for Economic Cooperation and Development (OECD), the nominal house price index for OECD countries has on average risen by 21 percentage points in the last four years.
Emerging regions catch up
In most parts of the world, debts grew faster in 2017 than in the previous year. The growth rate increased over the course of the year from 3.3% to 3.8% in North America, from 5.9% to 6.2% in Oceania, from 2.6% to 3.0% in Western Europe, from 4.8% to 7.4% in Eastern Europe and from 6.7% to 8.4% in Latin America. In contrast, borrowing slowed slightly in Japan (from 2.4% to 1.8%) and the rest of Asia, albeit it remained on a very high level (from 16.5% to 15.8% of GDP).The geographical distribution of liabilities is similar to that of assets. The richer parts of the world accounted for a total of three-quarters of global debt at the end of 2017 (North America 36.4%, Western Europe 27.6%, Oceania 4.2% and Japan 6.6%). However, their total share came to around 90% at the beginning of the last decade, which means that the emerging regions of Latin America, Eastern Europe and Asia (excluding Japan) have significantly increased in importance. Private liabilities in these three regions more than quadrupled to around EUR 10 trillion in total in the period from 2007 to 2017, with average annual growth rates of 11.5% in Eastern Europe, 12.6% in Latin America and as much as 14.8% in Asia (excluding Japan).
However, in Latin America and Eastern Europe, the impact of the financial crisis can clearly be detected. Households have been considerably more cautious when it comes to borrowing in the past five years than in the first half of the last decade: Average growth rates almost halved.
Figure 1 Development of global household’s debt
In Asia (excluding Japan), on the other hand, credit growth remained more or less constant in both five year periods. As a consequence, liabilities in the region increased five-fold over the decade as a whole and totaled EUR 8.2 trillion at the end of 2017, 63% of which related to China alone. China's share had been only about half of this figure ten years ago.
In the developed regions of North America, Western Europe and Japan, average growth in liabilities has been a low single-digit percentage. Japan is bottom of the list with average growth of just 0.7% per year in the period from 2007 to 2017, after North America (+1.6%) and Western Europe (+2.2%). In most countries positive debt growth is a rather recent development. In Japan, for example, private debt declined until 2012. Only since did demand for credit increase again, causing liabilities in Japan to grow and bringing them to a total of around EUR 2.6 trillion at the end of 2017. In the US, too, households were forced to restructure their asset balance sheets in the wake of the subprime crisis, causing liabilities to fall by an average of 0.8% per year from 2008 to 2012. The trend has changed since then and average annual growth has risen to 2.2%. This was primarily due to student and car loans, which have grown at an average rate of 7.2% and 6.5% per year respectively in the last five years, reaching a total of EUR 2.6 trillion, or just under 17% of the total volume of loans, at the end of 2017. Before the property bubble burst, their share of the total was just under 10%. Total private debt in the US reached a new record level of around EUR 12.9 trillion.
The financial crisis also heralded a phase of restraint in borrowing in Western Europe, especially in the euro crisis countries. Households in Greece, Ireland, Portugal and Spain, for example, reduced their liabilities by a total of EUR 287 billion, or an average rate of 2.4% per year, since the end of 2008. In the region as a whole, however, the trend towards debt growth slightly picked up in the last few years. After borrowing stagnated in 2012 and 2013, annual growth accelerated continuously and reached 3.0% last year, the highest growth rate since 2008. Total debt in the region thus came to around EUR 10.9 trillion.
Private liabilities in Oceania grew much faster than in Western Europe and North America, with annual growth averaging 6.5% over the last decade. Average growth nevertheless dropped to less than half the levels reached in the years prior to the crisis.
Significant differences in the debt ratio
Households in Oceania have by far the highest per capita debt in a regional comparison. At an average of EUR 56,530 at the end of 2017, they were more than twice the average for Western Europe (EUR 26.180) and Japan (EUR 20.470). Even the North Americans had almost 30% less debt in per capita terms than households in Oceania, at EUR 39.880.
The gap between these two regions widened massively owing to diverging trends in debt. While average per capita debt in the two regions was almost equal as recently as 2008, at EUR 38,420 in North America and EUR 38,720 in Oceania, the difference increased to nearly EUR 17,000 per capita by the end of last year.
Per capita debt in emerging regions was much lower. Eastern Europe (EUR 2,000), Latin America (EUR 2,180) and Asia (excluding Japan) (EUR 2,560) were at similar levels. If we look at Asia (excluding Japan) without including the industrialized countries in the region, Israel (EUR 18,440), Singapore (EUR 35,310), South Korea (EUR 25,750) and Taiwan (EUR 18.550), the average drops to EUR 1,960.
Just as in per capita terms, there are also significant differences between the world's wealthier regions and emerging regions when it comes to the debt ratio, i.e. liabilities measured as a percentage of nominal economic output. Once again, Oceania is well ahead of all other regions: the ratio here has risen by just under one percentage point to 124.3% over the last year, while the increase since the end of 2007 comes to around 15 percentage points. That means that Oceania is drifting further and further from the global average.
This is the reverse of the trend in North America, where the ratio of debt to economic output has contracted by almost 17 percentage points compared with 2007 to 82.0%.
The region was thus still slightly above the average figure for industrialized countries of 78.7%. In Western Europe the ratio came to just under 75% in 2007, and two years later climbed to its highest level to date of 79.6%. Since the it declined by 5.6 percentage points to 74.0%, putting the region below the average for industrialized countries at the end of 2017. The debt ratio of Japanese households was much lower still. Although it increased by almost four percentage points compared with 2007, largely as a result of weak economic growth, it still stood at only 64.8% at the end of 2017.
Among emerging regions, the ratio of private liabilities to gross domestic product was lowest in Eastern Europe. After debt growth slowed considerably in the last three years, falling well below the pace of economic growth, the ratio dropped from its historic high of 25.0% in 2014 to 22.7% at the end of 2017. The ratio in Latin America was approximately 6 percentage points higher than in Eastern Europe at just under 29%.
Asia (excluding Japan) is giving greater cause for concern. The debt ratio there was more than twice as high as in Eastern Europe, at around 49%. Even if we exclude industrialized countries in the region, the ratio at the end of 2017 came to just under 43%, around 14 percentage points above the level in Latin America. At global level, the ratio of private liabilities to economic output increased slightly in 2017 to 64.3% (2016: 64.2%).
This ratio fell by nearly 8 percentage points since reaching a historic high in 2009 (71.9%). Since then, growth in debt has increasingly converged towards economic growth, until finally in 2016 liabilities grew faster than worldwide GDP, bringing the deleveraging process that began with the global financial crisis to an end.
Household debt still sustainable in most countries
These global and regional figures, however, conceal significant differences between individual countries. With debt restructuring efforts subsiding in recent years, private debt ratios have again reached new records in some economies.
This leads to the obvious but troubling question: How sustainable is the debt ratio in the household sector? To answer this question, the situation in the US shortly before the property bubble burst can be used as a benchmark. In 2007, the ratio of private household debt to GDP was around 100% and had increased by 20 percentage points over the previous five years.
The analysis thus compares these data with the current situation in industrialized countries. Where has the debt ratio risen similarly dramatically in the last five years and in which economies is it currently above 100%?
It becomes clear that most developed economies are outside the "danger zone", i.e. the debt ratio is currently still less than 100% and the increase compared with 2012 is well below 20 percentage points.
The ratio of debts to GDP has even declined in 14 countries over the last five years.
These include the countries that were hit hardest by the (debt) crisis (the US, Spain, Portugal and Greece), which also rank among the economies that have made the most progress in reducing their debts.
However, Denmark and the Netherlands, whose ratios are currently still 132% and 113% respectively, have also had some success in bringing their debt ratios back down towards the 100% mark.
There are five countries in particular where the debt dynamic in recent years appears problematic, as high debt ratios of around the 100% threshold and above are combined with a sharp increase. These are South Korea (97.5%, +13.7 percentage points), Canada (104.3%, +9.0 percentage points), Switzerland (129.6%, +10.4 percentage points), Australia (131.2%, +15.6 percentage points) and Norway (107.9%, +20.1 percentage points). Of all industrialized countries, however, only Norway matches the US benchmark from the subprime crisis
To conduct a similar analysis of the private debt situation in emerging countries, the benchmark has to be adjusted to the situation there, i.e. the "critical" thresholds are 50% for the debt ratio and 10 percentage points for the increase in the debt ratio. Unlike in industrialized countries, a regional pattern is apparent among emerging economies. Here, it is only households in Eastern European countries that not only have a debt ratio of less than 50% but have also reduced the ratio of liabilities to GDP compared with 2012. The exceptions are Poland, Serbia and Kazakhstan, where the debt ratio has risen slightly since then.
A debt ratio of less than 50% combined with a moderate increase in the ratio over the last five years prevails in parts of Asia (India and Indonesia) and in Latin America. Yet once again, one exception proves the rule here: Chile. Following a large increase of 10.2 percentage points in the ratio of liabilities to GDP, the debt ratio is now 48% and is thus approaching the 50% mark.
Other than Chile, there are three Asian countries in particular where development of private debt appears critical.
These include Thailand and Malaysia on one hand, where debt ratios are already coming close to the 100% threshold of industrialized countries at 79.1% and 84.4% respectively; the increase over the last five years has at least been less than 10 percentage points.
The other country is China, where the ratio is 49.1%. Although this still falls very slightly short of the 50% mark, it has risen by 19.2 percentage points in the last five years. This rapid rise almost matches the experience of the US in the run-up to the subprime crisis.
In conclusion, private household debt is still at a moderate level in most countries; debt reduction and restraint in lending in recent years had an impact.
Along with the US, this applies above all to Eastern Europe and the crisis-hit Southern European countries. However, in some economies – including both industrialized and emerging countries – developments seem very worrying and close monitoring is required. This applies, among others, also to China.
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The View November-December 2018