“Update required – Part II”

The key chart

The key message

While the private sector is deleveraging (passively) at the global level, elevated risks remain in Sweden, France, Korea, China and Canada. Unfortunately, these risks may be overlooked in a world that sees public sector debt as a problem but largely ignores private sector debt. That would be a mistake.

Why focus on Sweden, France, Korea, China and Canada?

First, their levels of private sector indebtedness exceed the “peak-bubble” level seen in Japan (214% GDP, 4Q94) and, in the cases of Sweden and France, the peak-bubble level seen in Spain (227% GDP, 2Q10) too. Potential warning sign #1.

Second, in contrast to other economies that exhibit high levels of private sector indebtedness (eg, the Netherlands, Denmark, and Norway) affordability risks are also elevated in these five highlighted economies. Their debt service ratios are not only high in absolute terms (>20% income), they are also elevated in relation to their respective 10-year, average affordability levels. Potential warning sign #2.

Note, finally, that among these five economies, Sweden, Korea and Canada have over-indebted NFC and HH sectors, while the risks in France and China relate more, but not exclusively, to their NFC sectors. When it comes to private sector debt dynamics, the world is far from a homogenous place…

Update required – Part II

Global private sector indebtedness (debt % GDP) fell between 2Q21 (172% GDP) and 2Q22 (160% GDP) according to the latest BIS data release (5 December 2022).

This was a form of passive deleveraging ie, total debt increased over the period (from $142tr to $143tr) but at a slower pace that nominal GDP (see chart above). Both corporate (NFC) and household (HH) debt ratios fell over the period.

While China ($39tr) and the US ($38tr) collectively account for 54% of total private sector debt, they rank only #9 and #22 in terms of indebtedness. As noted many times before, debt and indebtedness are not the same things.

The most indebted private sectors among the BIS reporting economies are Luxembourg, Hong Kong, Switzerland, Sweden, the Netherlands, France, Denmark, South Korea, China, Canada. Norway and Singapore. In each case, private sector credit exceeded 200% of GDP at the end of 2Q22 (see chart above).

This highlighted group of relatively indebted private sectors are far from homogenous, however:

• Luxembourg, Hong Kong, Singapore and Switzerland have unique “financial roles” that differentiate them from the other economies, for example;
• Among the remaining nations only China and South Korea experienced increases in both NFC and HH indebtedness between 2Q21 and 2Q22;
• All of them have relatively indebted NFC sectors (NFC debt >90% GDP), but Switzerland, the Netherlands, Denmark, Korea and Canada also have “overly-indebted” HH sectors (HH debt > 85% GDP)
• In contrast, France, China, Norway and Singapore have “overly indebted” NFC sectors, but less elevated HH debt ratios

Returning to the theme of history repeating itself and/or rhyming, I have chosen to highlight private sector dynamics in Sweden, France, South Korea, China and Canada for two reasons – their level of private sector indebtedness in relation to trends observed during debt bubbles in Japan and Spain, and their associated and elevated affordability risks.

Private sector debt levels peaked at 214% GDP in Japan and 227% GDP in Spain at the height of their respective private sector debt bubbles (in 4Q94 and 3Q10 respectively).

At the end of 2Q22, private sector debt levels in Sweden (269% GDP) and France (231% GDP) exceeded the peak levels in both Spain and Japan while the private sector debt levels in Korea (222% GDP), China (220% GDP) and Canada (220% GDP) exceeded the peak level in Japan but remained below the Spanish peak.

Note again that among these five economies, Sweden, Korea and Canada have over-indebted NFC and HH sector, while the risks in France and China and relate more, but not exclusively, to their NFC sectors.

Private sector debt service ratios in Sweden, Canada, South Korea, France and China are not only high in absolute terms (ie, > 20%), but they also exceed their 10-year average levels. In contrast, while DSRs in the Netherlands, Norway and Denmark appear relatively high in absolute terms, there are below their respective 10-year averages. Note that due to comparability issues between DSR calculations, the BIS prefers to focus on deviations from LT averages when assessing affordability risks.

Conclusion

While the private sector is deleveraging (passively) at the global level, elevated risks remain in Sweden, France, Korea, China and Canada. Unfortunately, these risks may be overlooked in a world that sees public sector debt as a problem but largely ignores private sector debt. That would be a mistake.

Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.