UK aggregate and delayable goods card payments in relation to pre-pandemic levels (Source: ONS; CMMP)
The key message
UK households (HHs) are delaying their spending on so-called “delayable” goods such as clothing and furniture. This matters for two reasons:
First, spending on delayable goods is our preferred proxy for the return of the excess savings built up during the pandemic to productive use;
Second, a key assumption in the latest OBR forecasts for the UK economy and public finances is that HHs will run down their excess savings (and increase their borrowing) to fuel consumption in the face of declining real wages.
The message from the money sector so far this year is that UK aggregate spending is recovering steadily but the sustainability of consumption remains unproven. HHs are spending more on getting to work, for example, but less on buying clothes, furniture and other durable goods.
In short, the accumulation of excess savings may have slowed but we await further evidence that these savings are being run down to support sustained consumption as the OBR expects.
Delaying the delayable in charts
Delayable goods payments in relation to pre-pandemic levels (Source: ONS; CMMP)
UK households (HHs) are delaying their spending on so-called “delayable” goods such as clothing and furniture. According to the latest ONS real-time indicators, credit and debit card purchases on delayable goods in the week to 17 March 2022 were 82% of their February 2020 average (see chart above). This means that delayable spending is currently the weakest segment of HH spending. Spending on work-related, staples, and social goods and services are currently 17%, 9% and 5% above pre-pandemic levels (see chart below).
UK card spending in relation to pre-pandemic levels (ppt) broken down by type (Source: ONS; CMMP)
This matters for two reasons. First, spending on delayable goods is our preferred proxy for the return of the excess savings built up during the pandemic to productive use. Second, and related to this, a key assumption in the latest OBR forecasts for the UK economy and public finances is that HHs will run down their excess savings (and increase their borrowing) to fuel consumption in the face of declining real wages (see “Good news for Rishi, but…”).
Aggregate UK card spending in relation to pre-pandemic levels (Source: ONS; CMMP)
The message from the money sector so far this year is that UK aggregate spending is recovering steadily (see chart above) but the sustainability of consumption remains unproven. HHs are spending more on getting to work, for example, but less on buying clothes, furniture and other durable goods (see chart below).
Delayable versus work-related card spending in relation to pre-pandemic levels (Source: ONS; CMMP)
In short, UK HH’s accumulation of excess savings may have slowed but we await further evidence that these savings are being run down to support sustained consumption as the OBR expects.
Please nore that the summary comments and charts above are extracts from more detailed analysis that is available separately.
Trends and forecasts for public sector net borrowing as % GDP (Source: OBR; CMMP)
The key message
In its “Economic and fiscal outlook”, the Office of Budget Responsibility (OBR) delivered mixed messages for the UK economy and public finances.
The headlines are likely to focus on the forecast that the government’s borrowing will narrow to -1.1% GDP by 1Q27. This would be the lowest budget deficit for 25 years (£32bn) and music to the ears for a Chancellor who believes in his moral responsibility to balance the budget.
The forecasts assume (1) dramatic role reversals in the position of the UK government vis-à-vis the household (HH) sector and (2) sustained and significant current account deficits throughout the forecast period. They also present a more subdued outlook for business investment.
The key risks lie in the assumption that, in the face of falling real incomes, HHs will maintain consumption via reducing their savings ratio to a record low and/or increasing borrowing further (despite high HH debt ratios).
Beyond these risks, there are two further problems with these latest OBR forecasts:
First, the assumed end-position envisages BOTH domestic sector sectors running persistent net deficits beyond 4Q22, leaving the UK reliant on the RoW as a net lender. Such a scenario appears neither attractive nor sustainable;
Second, and more fundamentally, the implied shift away from public debt to private debt reflects the persistent flaw in conventional macro thinking that typically ignores the risk associates with private debt while seeing public debt as a problem rather than a solution.
Faced with these two problems, I believe that the greatest value in these forecasts lies in the insights they provide into the key drivers and assumptions that lie behind current policy and thinking. From there, we can all form our own views as to the likelihood of them being achieved in reality…
Good news for Rishi, but…
Trends and forecasts for public sector net borrowing as % GDP (Source: OBR; CMMP)
The OBR provided good news for Rishi Sunak, the UK Chancellor, in its latest “Economic and fiscal outlook” published on Wednesday 23 March 2022.
The UK government’s net borrowing position has already narrowed to -10.1% GDP (3Q21) versus previous expectations of -11.4%. More significantly, the OBR expects this to narrow to -1.1% by 1Q27 compared with previous forecasts of -1.5% (see chart above). This would represent the lowest budget deficit for 25 years (£31.6bn). Music to the ears for a Chancellor who believes in a moral responsibility to balance the budget.
Key OBR assumptions
Trends and forecasts for HH net borrowing as % GDP (Source: OBR; CMMP)
The key assumption behind the OBR’s forecasts is that the HH sector moves from its traditional role as a net lender to the rest of the economy to being a sustained net borrower (see chart above).
Such a transition would involve remarkable role reversals from a period when the “Government took exceptional measures to protect HH incomes from the full effect of one crisis (the pandemic) to one in which imported cost rises force HHs to save less to cushion the blow to real spending” (OBR, March 2022).
In short, to move to a net lender position, HHs would need to either reduce their savings and/or increase their borrowings.
Trends and forecasts for HH savings ratio (Source: OBR; CMMP)
The OBR forecasts a more dramatic reduction in the HH savings ratio than previously, to a record low of 2.8% by the start of 2023 (see chart above). This would allow HHs to maintain their consumption levels in the face of the expected fall in real incomes.
To support this assumption, the OBR notes that HHs have, “saved around £230bn more than in the equivalent period before the pandemic, of which around £185 billion is held in highly liquid deposits.” This is true but much of these excess savings have accrued to HHs that already have sizable savings, have higher incomes, and are much older. Such HHs typically spend less from an extra savings they accumulate.
With the OBR also forecasting that the savings ratio will remain at around 5% through their forecast period, below the LT average of around 8%, the risks to this assumption lie to the downside, in my view.
UK household debt ratio (% GDP) (Source: BIS; CMMP)
The OBR argues that, “in practice the lower savings ratio will reflect some HHs running down excess savings while other take on more debt.” In that context, it is worth noting that the HH debt ratio has fallen from its peak of 97% GDP in 1Q10 to 88% GDP at the end of 3Q21. Nonetheless, it remains above the BIS maximum threshold level, above which debt becomes a drag in future growth (see chart above).
While the cost of servicing debt remains very low, the overall debt ratio suggests that HHs may be reluctant to increases borrowing levels dramatically from current levels.
Trends and forecasts for NFC net borrowing as % GDP (Source: OBR; CMMP)
In another example of assumed role reversals, the OBR expects the NFC sector to remain a net lender until 2Q25 (see chart above). Note that NFC sectors are typically net borrowers while HH sectors are typically net lenders.
The OBR notes that, “since the start of the pandemic, business investment has been weak and recovered more slowly than other elements of expenditure.” In the 4Q21, business investment remained over 10% below its pre-pandemic peak and almost 3% below the OBR’s previous forecast. In its downward revision, the OBR expects, “investment not to recover to its pre-pandemic peak until the end of 2022 – nearly a year later than GDP as a whole”.
Trends and forecasts for RoW net borrowing as % GDP (Source: OBR; CMMP)
With both UK domestic sectors forecast to run simultaneous net deficits, the OBR assumes (by definition) that the ROW’s net surplus (ie, the UK’s current account deficit) will remain significant and of a similar size to the years before the pandemic. In other words, the UK will remain reliant on the RoW as a net lender. No change from previous forecasts there.
Conclusion
OBR forecasts from a sector balances perspective (Source: OBR; CMMP)
The OBR’s forecast that the UK’s budget deficit will fall to just over 1% GDP (£32bn) in 2026-27 will be welcome news for Rishi Sunak. This would represent the smallest budget deficit (£32bn) for 25 years.
Viewed from a sector balances perspective, these forecasts assume dramatic role reversals in the position of the UK government vis-à-vis the HH sector (and to lesser extent between the HH and NFC sectors) and sustained and significant current account deficits. The key risks to these forecasts lie in the assumption that, in the face of falling real incomes, HH will maintain consumption via reducing their savings ratio to a record low and/or by increasing their borrowing further (despite HH debt ratios).
Beyond the risks to key assumptions, there are two further problems with the OBR forecasts.
First, the assumed end-game envisages BOTH domestic sector running net deficits from 4Q22 onwards leaving the UK increasing reliant on the RoW as a net lender. Such a scenario appears neither attractive nor sustainable (see chart above).
Second, and more fundamentally, the implied shift to replace public borrowing with more private borrowing reflects the flaw in conventional macro thinking that typically ignores the risks associated with private debt while seeing government debt as a problem rather than as a solution.
Faced with these two problems, I believe that the greatest value in these forecasts lies in the insights they provide into the key drivers and assumptions that lie behind current policy and thinking. From there, we can all form our own views as to the likelihood of them being achieved in reality…
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
The previous OBR forecasts viewed from a sector balances perspective (Source: OBR; CMMP)
The key message
The Office of Budget Responsibility (OBR) will publish its latest “Economic and fiscal outlook” tomorrow (Wednesday 23 March 2022) following the Chancellor’s Spring Statement in Parliament.
The outlook will present the OBR’s latest forecasts for the economy and public finances. The context remains one in which the Chancellor, Rishi Sunak, has pledged to restore order to the government finances after borrowing increased during the pandemic.
“The ongoing uncertainty caused by global shocks means it’s more important than ever to take a responsible approach to the public finances.”
Rishi Sunak quoted by Bloomberg (22 March 2022)
There are three key things to bear in mind when analysing these latest forecasts tomorrow:
Second, responsible fiscal outcomes are those that deliver a balanced economy not a balanced budget (see “Note to Rishi“)
Third, previous OBR forecasts for improvements in UK government finances (see key chart above) relied on unsustainable assumptions including sustained, twin domestic deficits counterbalanced by significant and persistent current account deficits (see “A return to abnormality“)
Rather than sending a message of fiscal responsibility, such assumptions smell more of “reverse engineering.” As always, one chart among the 200+ pages, will tell us all we need to know tomorrow…
Where are the “real risks” in French debt dynamics?
The key chart
Trends in French debt ($bn) broken down by sector (Source: BIS; CMMP)
The key message
France’s state auditor, the Cour des Comptes, “sounded the alarm” about the impact of pandemic spending on France’s widening budget deficit and rising government debt levels last week. The auditor also raised concerns about potential risks to the cohesion of the EA. Are these concerns justified or do greater risks lie elsewhere within French debt dynamics?
The auditor is correct to highlight the impact of pandemic spending on the government’s net borrowing. This rose from 78bn in 3Q19 to €220bn in 3Q21. The level of government debt and the debt ratio are close to their record 1Q21 highs. The debt ratio has remained above the EA’s 60% GDP threshold for the past two decades and the divergence in the debt ratios of France and Germany in the post-GFC period represents a “potential risk to the cohesion of the EA”.
The first counter argument, based on national accounting principles, is that the correct level of government net borrowing is the one that balances the economy not the budget. The level of private sector net lending rose from €75bn in 3Q19 to €225bn in 3Q21, driven largely by HH net savings of €134bn. In other words, the net borrowing of the government was a necessary, timely and appropriate response to the scale of the private sector’s net lending/disinvestment.
The second counter argument is that that while the outstanding stock of French government debt may be the fourth highest in the world, France ranks lower in terms of government indebtedness. This argument will be more compelling to those who view debt sustainability (correctly) as a flow concept, but much less compelling to those who prefer the traditional stock-based approach.
From a risk and financial stability perspective, we are more concerned about France’s private sector debt dynamics, particularly in the NFC sector. France has relatively high exposure to the NFC sector, the fifth most indebted NFC sector globally. In spite of this, France has seen the third highest rate of excess NFC credit growth globally over the past three years. Affordability risks in the NFC sector are also elevated in absolute terms and in relation to historic trends. While the level of HH indebtedness in France is low in absolute terms, the risks associated with excess HH credit growth and affordability are elevated in this sector too.
The headlines resulting from the Cour des Comptes’ report support our wider hypothesis that conventional macro thinking is flawed to the extent that it typically ignores private debt while seeing government debt as a problem rather than as a solution.
Sonnez l’alarme?
France’s state auditor, the Cour des Comptes, “sounded the alarm” about the impact of pandemic spending on the widening budget deficit and level of government debt in its 2022 Annual Report published on 16 February 2022. The auditor also argued that the government should revise its deficit reduction plans after April’s presidential election, claiming that current plans risk fuelling divergences within the euro area, especially with more fiscally conservative countries such as Germany.
The supporting evidence
Trend in government net borrowing over the past twenty years (Source: ECB; CMMP)
The state auditor is correct to highlight the impact of pandemic spending on the budget deficit. As illustrated in the chart above, the government’s net borrowing rose from €78bn in 3Q19 to €220bn in 3Q21. The current level of net borrowing is also higher than the previous peak net borrowing of €143bn in the aftermath of the GFC. Viewed in isolation, this is a scary chart!
Trends in government debt and debt ratios over the past twenty years (Source: BIS; CMMP)
The level of government debt and the debt ratio are also close to their all-time highs (see chart above). The outstanding stock of government debt rose form €2,727bn in 2Q19 to €3,088bn in 2Q21, slightly below the peak 1Q21 level of €3,099bn. The government debt ratio (the blue line above) rose from 113% GDP in 2Q19 to 128% GDP in 2Q21. Again, the debt ratio also peaked at 134% GDP in 1Q21. Note that throughout the past two decades, France’s government debt ratio has exceeded the EA’s threshold of 60% GDP.
Trends in French and German government debt ratios (Source: BIS; CMMP)
The debt ratios of France and Germany have been on different trajectories for most of the post-GFC period. The German government debt ratio peaked at 86% GDP in 4Q12 and declined to a recent low of 64% GDP in 4Q19 (still above the EA’s threshold level). So again, the auditor is correct to highlight this as a “potential” source of risk to the cohesion of the EA.
The counter arguments
The first counter argument here is a simple one – the correct level of government net borrowing is the one that balances the economy not the budget. It is a basic principle of national accounting that the net borrowing of one economic sector (in this case the French government), must be equal to net lending of one or other economic sector(s) (see “Everyone has one”).
Private sector net lending versus public sector net borrowing (Source: ECB; CMMP)
The chart above plots the net lending of the private sector and the net borrowing of the public sector together. The level of private sector net lending, or disinvestment (the blue area), rose from €75bn in 3Q19 to €225bn in 3Q21, driven largely by HH net savings of €134bn and FI net savings of €125bn.
In other words, the increase in the government’s net borrowing position essentially matched the increase in the private sector’s net lending position. Rather than a source of alarm, the spending response of the French government was necessary, timely and appropriate.
The second counter-argument is that while, the outstanding stock of French government debt may be the fourth highest in the world, France is ranked lower in terms of government indebtedness (with a debt ratio similar to the UK).
Top 10 BIS reporting economies ranked by total government debt (EURbn) (Source: BIS; CMMP)
The chart above ranks the top ten BIS reporting countries in terms of outstanding government debt. Total government debt was $3,670bn at the end of 2Q21, representing a 4% share of global government debt after the US (33%), Japan (14%) and the UK (5%). The chart below ranks the top ten BIS reporting countries in terms of the government debt ratio. In this case, France’s ranking drops to #8 globally and #7 in Europe after Greece, Italy, Portugal, Spain, Belgium and the UK.
Top 10 BIS reporting economies ranked by government debt ratio (% GDP) (Source: BIS; CMMP)
This second counter-argument will be less persuasive for those who view debt sustainability as a stock concept (the traditional approach). They will point to the fact that France’s government debt ratio is not only above the EA average, but it is also above the (largely arbitrarily chosen) 60% or 90% thresholds. CMMP analysis, which is centred on the sector balances framework, considers both fiscal space and debt sustainability as flow concepts and for reasons mentioned above (and possibly in future posts) is less concerned here.
What about private sector debt dynamics?
From a risk and financial stability perspective, we are more concerned about France’s private sector debt dynamics, particularly in the NFC sector.
Trends in the breakdown of French and EA debt (Source: BIS; CMMP)
France has a relatively high exposure to NFC debt. At the end of 2Q21, NFC debt accounted for 46% of total debt. This is down from 50% at the time of the GFC (see chart above) but remains above the aggregate shares of 32% and 39% for advanced and EA economies respectively. Why does this matter?
Top 10 BIS reporting economies ranked by NFC debt ratio (% GDP) (Source: BIS; CMMP)
France’s NFC sector is the fifth most indebted NFC sector among BIS economies. At the end of 2Q21, the NFC debt ratio was 170% GDP, after Luxembourg (322%), Hong Kong (304%), Sweden (179%) and Ireland (171%). The French NFC debt ratio is well above the 111% GDP and 98% GDP aggregate for all advanced and EA economies respectively and the 90% threshold level above which the BIS considers debt to be a drag on future growth.
In spite of the high level of NFC indebtedness, France has seen the third highest levels of excess NFC credit growth over the past three years (see chart above). The NFC sector’s RGF was 4.8% in 2Q21, after Switzerland (6.7%) and Japan (6.6%). The rate of excess NFC credit growth was well above the EA average of 1.8% and higher than the 3.0% average for all advanced economies. Risks are clearly elevated when excess rates of credit growth combine with high levels of indebtedness, as is the case here (for an explanation of the RGF framework see here.)
Trends in NFC debt service ratio (Source: BIS; CMMP)
The NFC debt service ratio (DSR) is also high in absolute terms and above its respective LT average despite the low absolute cost of NFC borrowing. As at the end of 2Q21, the DSR was 60%, 9ppt above its LT average of 51% (see chart above). France is one of four advanced economies where the DSRs are high in both absolute terms and in relation to LT averages, along with Sweden, Canada, and Norway (see chart below).
NFC debt service ratios and deviations from LT averages (Source: BIS; CMMP)
While the level of HH indebtedness in France is low in absolute and relative terms, the risks associated with excess HH credit growth and affordability are elevated in this sector too. At the end of 2Q21, the HH debt ratio was 67% GDP, slightly below the 4Q20 peak level of 68%. The HH debt ratio is higher than the 61% EA average but below the 77% advanced average and the BIS threshold level of 85% GDP. Nonetheless, France has the seen the highest rate of excess HH credit growth over the past three years among EA and other advanced economies. The HH’s debt service ratio, while low in absolute terms, is also above its LT average (see “Global debt dynamics – IV” for more details and charts).
Conclusion
The COVID-19 pandemic had a significant impact on the French government’s net borrowing and the level of government debt. The widening gap between France’s government debt ratio and those of the so-called “fiscally-conservative” economies is also a potential source of conflict with the EA. Viewed from a sector balances perspective, however, the government’s response was timely, necessary and appropriate. We are also more concerned about the risks associated with private sector debt dynamics, particularly in the highly indebted NFC sector.
More fundamentally, the headlines resulting from the Cour des Comptes’ report support our wider hypothesis that conventional macro thinking is flawed to the extent that it typically ignores private debt while seeing government debt as a problem rather than as a solution.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
The recovery story in UK consumption remains steady rather than dramatic
The key chart
Aggregate UK card payments in relation to pre-pandemic levels (Source: ONS; CMMP)
The key message
Strip out seasonal effects and the “steady recovery” story for UK consumption remains on track.
The behaviour of UK households (HH) reached an important inflexion point in early 4Q21. The year also ended with monthly HH deposit flows, a useful proxy for uncertainty levels, falling to 0.6x pre-pandemic levels and improving monthly and quarterly consumer credit trends. Positive news.
So-called “faster indicators” for estimating credit and debit card payments indicate weakness in spending at the start of the 2022. The ONS suggests that these trends were consistent with seasonal effects, however. Spending has recovered more recently with “aggregate” and “social” payments slightly below pre-pandemic levels and “staples” and “work-related” payments both above.
Payments on durable items, such as clothing and furniture, remain below pre-pandemic levels. This matters because payments on these items represent the best proxy for a more sustained recovery in UK consumption and a return of some of the c£162bn excess savings built up during the pandemic to more productive use.
In short, the message from the money sector is one of a steady rather than a dramatic recover in UK consumption so far…
Steady as she goes II – six charts that matter
Monthly HH money flows (£bn) since January 2019 (Source: BoE; CMMP)
In early December 2021, I argued that the behaviour of UK HHs had reached a potentially important inflexion point at the start off the 4Q21. Monthly money flows (a proxy for HH uncertainty) had moderated sharply (see chart above) and monthly consumer credit flows had reached new YTD highs. I also warned, however, that the emergence of the omicron variant and renewed restrictions might result in “these points being missed, or worse still, reversed”.
The year actually ended on a relatively positive note. Monthly HH deposit flows dropped to £2.7bn, 0.6x their pre-pandemic levels (see first chart in this section above). Monthly consumer credit flows remained at c£1bn in the last three months of 2021 (see chart above), delivering the largest quarterly flows since the pandemic hit the UK economy (see chart below). Of course, the YoY growth rate in consumer credit of 1.4% YoY remains relatively modest in relation to past trends and negative in real terms.
Quarterly flows in UK consumer credit (£bn) (Source: BoE; CMMP)
So-called “faster-indicators” for estimating UK spending on credit and debit cards point to volatility/weakness in consumer spending at the start of 2022.
Aggregate card spending in relation to pre-pandemic levels (Source: ONS; CMMP)
Aggregate card payments fell from 130% of their pre-pandemic levels on Christmas Eve 2021 to 75% on the 4th January 2022. Since then they have recovered steadily to 96% of their pre-pandemic levels by 3rd February 2022 (see chart above). The ONS suggests that observed trends are consistent with seasonal effects.
Card spending in relation to pre-pandemic levels broken down by type (Source: ONS; CMMP)
“Aggregate” and “social” payments have recovered, but remain slightly below pre-pandemic levels as of early February 2022. “Staples” and “work-related” payments have recovered the most and are both above their respective pre-pandemic levels (see chart above). The chart illustates the difference between current payments and average payment levels in February 2020 in percentage points.
Aggregate payments and payments on durable goods in relation to pre-pandemic levels (Source: ONS; CMMP)
Payments on durable items, such as clothing and furniture, remain below pre-pandemic levels (see chart above). This matters because payments on these items represent the best proxy for a more sustained recovery in UK consumption and a return of some of the c£162bn excess savings built up during the pandemic to more productive use.
Conclusion
In short, the message from the money sector is one of a steady rather than a dramatic recover in UK consumption so far…
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
UK and euro area (EA) money sectors have sent remarkably consistent messages throughout the COVID-pandemic. Shared trends in monetary aggregates, for example, provided similar conclusions regarding household (HH) behaviour, consumption and growth, the challenges facing policy makers, and the productivity of lending to the private sector (PSC).
The 4Q21 proved to be an important inflexion point in terms of HH confidence and behaviour in both regions. By December 2021, monthly deposit flows had moderated to 0.6x and 0.7x their pre-pandemic levels in the UK and EA respectively, leaving excess savings of c£162bn and c€285bn in the form of bank deposits. Demand for consumer credit recovered to 1.4% YoY and 1.2% YoY in the UK and EA respectively, and quarterly flows were positive in each of the past three quarters. So far, so good.
In addition to rising inflation, the Bank of England and the ECB both face on-going challenges in terms of the persistent desychronisation of money and credit cycles, which limits monetary policy effectiveness, and the fact that policy responses to date have fuelled growth in the wrong type of credit. The gap between the growth in money supply (ST liabilities of banks) and growth in PSC (key assets of banks) has narrowed but remains wide by historic standards. Nonetheless, the build-up of excess liquidity in both regions is slowing. Mortgage lending, the largest element of so-called “FIRE-based” lending, continues to be the main driver of PSC in the UK and the EA. This has potentially negative implications for growth, leverage, income inequality and financial stability.
In short, the money sectors in the UK and EA continue to sing from the same song sheet. The message for corporates, policy makers and investors alike is that an important inflexion point was reached in terms of HH confidence and behaviour in 4Q21. This is welcome news.
Of course, policy challenges remain and a slowdown in excess liquidity and/or a diversion into productive COCO-based lending rather than less productive FIRE-based lending may be less welcome news for financial assets in 2022.
The money sectors in the UK and the euro area (EA) have sent remarkably consistent messages throughout the COVID-19 pandemic. We know that narrow money (M1), and overnight deposits within M1, drove the expansion of broad money (M4ex, M3 respectively) in both regions during 2020, for example. In other words, the rise in broad money illustrated in the chart above was a reflection of the deflationary forces of increased savings and delayed consumption.
We also know that, as at the end of December 2021, M1 represented 68% and 73% of M3 in the UK and the EA, up from 48% and 51% respectively a decade earlier (see chart below). Preference for highly liquid assets remains high, despite the negative real returns earned from those assets.
Narrow money as a share of broad money since December 2011 (Source: BoE; ECB; CMMP)
A sustained recovery in both regions required/requires a reversal of these deflationary trends ie, a moderation in monthly HH deposit flows and a recovery in consumer credit (see “Three key charts for 2021”). Central banks also need to see a resynching of money and credit cycles. Why? Because, monetary policy effectiveness is based on certain stable relationships between monetary aggregates.
Monthly HH deposit flows as a multiple (x) of pre-pandemic levels (Source: BoE; ECB; CMMP)
As noted in “Missing the point?” in December 2021, HH behaviour reached a potentially important inflexion point at the start of the 4Q21. Monthly deposit flows (see chart above) peaked at 5.9x pre-pandemic levels in the UK in May 2020 and 2.4x pre-pandemic levels in the EA in April 2020. In December 2021, these flows had moderated to 0.6x and 0.7x pre-pandemic levels respectively. During this process HHs have accumulated excess savings in the form of bank deposits of £162bn in the UK and €285bn in the EA (CMMP estimates).
Annual growth rates in consumer credit reached a low point in February 2021 in both the UK (-10% YoY) and the EA (-3% YoY). In December 2021, however, annual growth rates had recovered to 1.4% YoY and 1.2% YoY respectively in the UK and EA respectively (see chart above). More importantly perhaps, quarterly flows of consumer credit have been positive and rising for the past three quarters (see chart below). The 4Q21 flows of £3bn and €4bn in the UK and EA respectively remain below pre-pandemic levels, however, especially in the EA where quarterly flows averaged €10bn during 2018-2019.
Quarterly flows in consumer credit (£bn, EURO bn) (Source: BoE; ECB; CMMP)
The COVID-19 pandemic exacerbated the desynchronisation of money and credit cycles in the UK and EA creating major challenges for policy makers, banks and investors alike. The degree of this desynchronisation peaked in early 2021 and reached its narrowest level since early 2020 in December 2021 (see chart below). That said, the gap between the growth rates of money supply (short-term liabilities of banks) and private sector lending (the main asset of banks) persists and remains high in a historic context.
Growth in lending (% YoY) minus growth in money supply (% YoY) (Source: BoE; ECB; CMMP)
Mortgage lending, the largest element of so-called “FIRE-based lending”, continues to be the main driver of PSC growth in both regions (see chart below). In December 2021, mortgage lending grew 5.1% YoY in the UK and 5.4% YoY in the EA. Lending to NFCs, the largest element of more productive “COCO-based lending”, rose 4.2% YoY in the EA but fell -0.4% YoY in the UK. As described above, consumer credit, another form of COCO-based lending grew 1.4% YoY and 1.2% YoY in the UK and EA respectively.
Breakdown on PSC growth by type of lending (% YoY) (Source: BoE; ECB; CMMP)
Conclusion
The money sectors in the UK and EA continue to sing from the same song sheet. The message for corporates, policy makers and investors alike is that an important inflexion point was reached in terms of HH confidence and behaviour in 4Q21. This is welcome news. Of course, policy challenges remain and a slowdown in excess liquidity and/or a diversion into productive COCO-based lending rather than less productive FIRE-based lending may be less welcome news for financial assets in 2022.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
HH behaviour is normalising but policy challenges remain in the euro area
The key chart
Monetary developments in the euro area since 1999 (Source: ECB; CMMP)
The key message
Broad money growth in the euro area (EA) slowed to 6.9% in December 2021, the slowest rate of growth since February 2020. What is the main driver here and what are the messages for household behaviour, growth, macro policy and the productiveness of lending?
Narrow money (9.8% YoY) continues to be the main driver of broad money growth, contributing 7ppt to the overall 6.9% growth. Overnight deposits (10.1% YoY) contributed 6.2ppt alone. Note (again) that money sitting idly in overnight deposits contributes to neither growth nor inflation. Explanations for rising inflation lie elsewhere.
The on-going moderation in monthly household (HH) deposit flows indicates reduced uncertainty and a normalisation of behaviour. While these flows rose from €17bn in November 2021 to €23bn in December 2021, they remain below the pre-pandemic average of €33bn.
HHs repaid €3.3bn in consumer credit in December 2021, the first net repayments since April 2021. That said, positive quarterly flows of consumer credit of €2bn, €4bn and €b4bn in 2Q21, 3Q21 and 4Q21 respectively also point to a steady normalisation in HH behaviour.
Money and credit cycles remain out-of-synch with each other, presenting an on-going challenge to policy makers. The degree of de-synchronisation reached its narrowest level since March 2020, however, an indication that the build-up of excess liquidity in the EA is slowing.
The additional challenge for policy makers is that less productive FIRE-based lending continues to be the main driver of PSC. This re-enforces the need for macroprudential polices to address rising financial stability risks in the residential real estate (RRE) sector.
In short, the message from the money sector at the end of 2021 and the start of 2022 is mixed. HH behaviour is normalising with deposit flows moderating and demand for consumer credit recovering. Against this, policy makers face the dual challenge of de-synchronised money and credit cycles and excess growth in less-productive FIRE-based lending. Four key signals to watch in 2022…
Slow and steady as she goes
Long-term trends in EA broad money (% YoY) (Source: ECB; CMMP)
Broad money (M3) growth in the euro area (EA) slowed from 7.4% YoY in November 2021 to 6.9% YoY in December 2022, the slowest rate of growth since February 2021 (see chart above). This post examines the current drivers of broad money growth and the implications for household behaviour, growth, macro policy and the productivity of lending in the EA.
Twenty year trends in M3 (% YoY) and contribution (ppt) from M1 (Source: ECB; CMMP)
Narrow money (M1) continues to be the key driver of broad money growth in the EA. M1 grew 9.8% YoY in December 2021 and contributed 7.0ppt to the overall 6.9% growth in broad money alone (see chart above). Within M1, overnight deposits grew 10.1% YoY and contributed 6.2ppt to M3 growth while currency in circulation grew 7.7% YoY and contributed 0.7ppt to M3 growth.
The key point here is that growth in overnight deposits has been the main driver of broad money growth during the COVID-19 pandemic. This matters because money sitting idly in bank deposits contributes to neither growth nor inflation. The causes of rising inflation lie elsewhere.
Trends in monthly HH deposits (EURbn) since January 2019 (Source: ECB; CMMP)
The on-going moderation in monthly household (HH) deposit flows indicates reduced uncertainty and a normalisation of HH behaviour. The sharp rise seen during Phase 2 of the pandemic (see chart above) was driven by a combination of forced and precautionary HH savings – that is, money that was not spent. At their peak of €78bn in April 2020, monthly flows were almost 2.5x their pre-pandemic levels.
In December 2021, monthly flows had fallen back to €23bn, up from €17bn in November 2021, but below the pre-pandemic average level of €33bn. Similarly, HH deposit flows for the 4Q21 were €59bn, down from €109bn and €93bn in the 3Q21 and 2Q21 respectively and below the average €99bn quarterly flows recorded during 2019.
Monthly flows (EUR bn) and growth rates (% YoY) in consumer credit (Source: ECB; CMMP)
HHs repaid €3.3bn in consumer credit in December 2021. This was the first net repayment since April 2021 (see chart above). That said, quarterly flows of consumer credit €2bn, €4bn and €b4bn in 2Q21, 3Q21 and 4Q21 respectively (see chart below) also point to a normalisation in HH behaviour.
Quarterly flows (EUR bn) in consumer credit (Source: ECB; CMMP)Trends in money and credit cycles in the euro area (Source: ECB; CMMP)
Money and credit cycles remain out-of-synch with each other, presenting an on-going challenge to policy makers. The gap between the YoY growth rate of PSC (4.7%) and the YoY growth rate in M3 (6.9%) was -2.8ppt in December 2021 (see chart above). While the degree of de-synchronisation has reached its narrowest level since March 2020, the challenge for policy makers remains since, “monetary policy effectiveness is based on certain stable relationships between monetary aggregates” (Richard Koo, The Holy Grail of Macroeconomics).
Trends in PSC (% YoY) in nominal and real terms (Source: ECB; CMMP)
Private sector credit (PSC) grew 3.9% YoY in nominal terms in December 2021 but fell -1.0% YoY in real terms (see chart above). The additional challenge for policy makers is that less productive FIRE-based lending continues to be the main driver of EA credit. FIRE-based lending contributed 2.5ppt to the overall 3.9% YoY growth rate in PSC in December 2022 (see chart below). Mortgages alone contributed 2.1ppt to this, re-enforcing the need for macroprudential polices to address rising financial stability risks in the residential real estate sector.
Trends in PSC (% YoY) and breakdown (ppt) between FIRE-based and COCO-based lending (Source: ECB; CMMP)
On a final positive note, the contribution of more productive COCO-based lending to overall PSC growth hit its highest level since March 2021 (see chart below), but all forms of COCO-based lending declined YoY in real terms.
Trends in PSC (% YoY) and contribution (ppt) of COCO-based lending (Source: ECB; CMMP)
Conclusion
In conclusion, the message from the money sector at the end of 2021 and the start of 2022 is mixed. HH behaviour is normalising with deposit flows moderating and demand for consumer credit recovering. Against this, policy makers face the dual, on-going challenge of de-synchronised money and credit cycles and excess growth in less-productive FIRE-based lending. Four key signals for 2022…
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
Total debt ($bn) and debt ratios (% GDP) for EM’s five largest debt markets (Source: BIS; CMMP)
The key message
Following recent analysis of global and emerging market (EM) debt dynamics and in advance of the Indian government’s announcement of its annual budget on 1 February 2022, this post summarises seven key structural features of Indian debt dynamics.
India is the third largest EM debt market in terms of total, private sector (PSC), corporate (NFC), and household (HH) debt after China and Korea and ahead of Brazil and Russia. Beyond absolute size, the key features of Indian debt dynamics include:
PSC accounts for a relatively low share (51%) of total debt. In this context, India ranks #15 among our sample of 21 EM economies
In terms of the private versus public sector breakdown, India is similar to Brazil but very different to Russia, Korea and China
This matters because risks associated with elevated private sector debt are greater than those associated with public sector debt
While Indian debt markets are large in absolute terms, the level of indebtedness is relatively low. Both the NFC (55% GDP) and HH (36% GDP) debt ratios are below both EM averages and BIS threshold limits
Indian debt ratios are also relatively low in an historic context. HH indebtedness peaked at 43% GDP in 3Q07 while NFC indebtedness peaked at 71% GDP in 4Q12 (n.b. debt levels and levels of indebtedness are very different measures!)
India has experienced periods of elevated risks associated with excess credit growth in the (not-so-distant) past – first in the NFC sector (until 4Q14) and then in the HH sector (since 3Q19). Current risks are moderate, however, in both sectors with RGFs below recent peaks
Affordability risks in India are also relatively low in EM, global and historic contexts. India’s PS debt service ratio of 10% is well below its 10Y average of 13%
These features re-enforce the conclusion of “Global Debt Dynamics – V” that it is time to “replace the EM debt story with individual EM country debt stories.” Debt dynamics and their implications for policy, investment decisions and financial stability differ markedly even among EM’s five largest markets.
In short, India scores relatively well in terms of the risks associated with structure, indebtedness, growth and affordability of debt.
The India debt story
Size
Total debt ($bn) and debt ratios (% GDP) for EM’s five largest debt markets (Source: BIS; CMMP)
India is the third largest EM debt market in terms of total ($4,656bn), PSC ($2,550bn), NFC (£1,540bn) and HH debt ($1,011bn) after China and Korea and ahead of Brazil and Russia (see chart above).
Structure
PSC debt as % of total debt for EM’s five largest debt markets (Source: BIS; CMMP)
A key feature of the structure of Indian debt is the relatively low share of private sector debt (51% total). In this context, India ranks #15 among the 21 BIS EM reporting economies. In other words, the private versus public sector breakdown of India debt is similar to Brazil but very different to Russia, Korea, and China (see chart above).
This matters because risks associated with elevated private sector debt are greater than those associated with elevated public sector debt.
Indebtedness
HH and NFC debt ratios for EM economies (Source: BIS; CMMP)
While India is a large debt market in absolute terms, the level of indebtedness is relatively low in an EM context (see above). In terms of PSC (90% GDP), NFC (55% GDP) and HH (36% GDP) debt ratios, India ranks #11, #12, and #10 respectively. Both the NFC and HH debt ratios are below the EM averages (dotted blue line) and the BIS threshold limits (dotted red line).
Trends in Indian PSC, NFC and HH debt ratios (% GDP) (Source: BIS; CMMP)
Indian debt ratios are also relatively low in an historic context. The HH debt ratio of 36% GDP is 7ppt below the 43% GDP peak reached back in 3Q07. The NFC debt ratio of 55% GDP is 16ppt below the 71% GDP peak reached in 4Q12, the point at which the PSC debt ratio also peaked at 106% GDP (see graph above).
NFC snapshot
NFC sector snapshot (Source: BIS; CMMP)
At the end of 2Q21, the level of outstanding NFC debt was $1,540bn, $39bn below the peak level recorded in the previous quarter. As noted above, India is the third largest NFC debt market in absolute terms with a market share of 4%. In terms of NFC indebtedness, however, India ranks #12 among the EM universe. NFC’s share of total debt (31%) is also relatively low. In this context, India ranks #14 among the EM universe.
HH snapshot
HH sector snapshot (Source: BIS; CMMP)
The level of outstanding HH debt was $1,010bn at the end of 2Q21, again £26bn below the peak level recorded in the previous sector. India is the third largest HH debt market in our EM universe with a market share of 6%. In terms of indebtedness, however, India ranks #10 among our EM universe. HH debt represents a relatively low 20% of total debt. In this context, India ranks #12 among our EM universe. In other words, the HH and NFC sectors share a number of similar characteristics.
In terms of risks to macro policy, investment decisions and financial stability, the lesson from EM history is that the rate of excess credit growth can be as important as the level of indebtedness.
The risks associated with excess credit growth in India are relatively low in an EM context (see chart) above and in an historic context. The latest PSC RGF of 1.8% is lower than the EM average of 6.0% and the levels for China (2.3%), Korea (5.8%), Brazil (6.2%) and Russia (2.2%), countries with higher of similar (Brazil) PSC debt ratios.
Trends in HH, NFC and PSC relative growth factors (Source: BIS; CMMP)
In the post-GFC period, India has experienced periods of elevate growth risks, first in the NFC sector and then in the HH sector. Over the past five years, these risks have been concentrated in the HH sector but rose more recently in the NFC sector again (see chart above). Note however, the rates of excess growth rates have peaked in both cases (and remain modest in absolute terms).
Affordability
EM debt service ratios (x-axis) and deviations from LT average (y-axis) (Source: BIS; CMMP)
Affordability risks in India are also relatively low in an EM and global context and in an historic Indian context. The chart above plots the latest debt service ratios (DSR) for BIS reporting economies (x-axis) and the deviation of each DSR from its LT average. As can be seen India has a relatively low DSR of 9.8%, well below its 10-year average of 12.5% (see also chart below).
Trends in Indian PSC debt service ratio (Source: BIS; CMMP)
Conclusion
These features re-enforce the conclusion of “Global Debt Dynamics – V” that it is time to “replace the EM debt story with individual EM country debt stories.”
Financial stability heatmap for EM’s five largest debt markets (Source: BIS; CMMP)
Debt dynamics and their implications for policy, investment decisions and financial stability differ markedly even among EM’s five largest markets, for example (see the summary heatmap above).
In short, India scores relatively well in terms of risks associated with structure, indebtedness, growth and affordability of debt (n.b. the lack of red shading in the heatmap above in relation to India).
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
Trends in EA COCO-based lending in EURO bn (Source: ECB; CMMP)
The key message
The outstanding stock of loans that support production and income formation in the euro area (“COCO-based loans”) hit a record high in November 2021 of €5,524bn. Is this cause for celebration? No, not quite…
Remarkably, this new high occurred 155 months after the previous high, recorded back in January 2009 (€5,5517bn). Equally notable/concerning is the fact that the stock of less-productive loans that support capital gains through higher asset prices (“FIRE-based loans”) also hit a new record high of €6,091bn. This was €1,503bn above the corresponding January 2009 level of €4,588bn.
What this means is that nearly all of the aggregate growth in euro area lending since the GFC has been in the form of less-productive lending (that also now accounts for more than half of total outstanding loans). So not only is current lending relatively subdued in volume terms (and negative in real terms) it is also largely the wrong type. FIRE-based lending accounted for 2.7ppt of the total 3.7% growth in private sector lending in November 2021, for example.
Over the past two years, I have been highlighting the associated, “hidden risks” associated with unorthodox monetary policy and the negative implications they have for future growth, leverage, financial stability and income inequality. More recently, I also noted that the ECB has (finally) called for (macroprudential policy) measures to address them with specific reference to “real estate risk” at the end of the year.
It is too early to expect changes in the next few data releases (starting this week on 28 January 2022) but I will be placing added emphasis on the trends in the mix of EA lending during 2022. Three key signals became four…
“It’s a record – (of sorts)”
Trends in EA COCO-based lending in EURO bn (Source: ECB; CMMP)
The outstanding stock of loans that support production and income formation (COCO-based loans) hit a record high of €5,524bn in November 2021. Remarkably, this new high occurred 155 months after the previous high recorded in January 2009 (see chart above).
Trends in, and breakdown of, EA private sector credit in EUR bn (Source: ECB; CMMP)
The outstanding stock of loans that support capital gains through higher asset prices (FIRE-based loans) also hit a new high of €6,091bn in November 2021, €1,503bn above the level recorded in January 2009 (see chart above). FIRE-based lending currently accounts for 52% of total euro area lending.
Trends in YoY growth rates in private sector lending in nominal and real terms (Source: ECB; CMMP)
Current lending in the euro area is characterised by relatively subdued volumes and the wrong mix when compared to the pre-GFC period. In November 2006, for example (see graph above), lending to the private sector was growing at 11.2% YoY in nominal terms and 9.2% YoY in real terms. Productive, COCO-based lending accounted for 6.2ppt of this growth, while less-productive FIRE-based lending accounted for 5.0ppt.
Drivers of recent YoY growth rates in EA private sector lending (Source: ECB; CMMP)
In contrast, according to the latest data point for November 2021, lending to private sector grew only 3.7% YoY in nominal terms but fell -1.1% in real terms. Less-productive lending accounted for 2.7ppt of the total 3.7% growth (see chart above).
Longer term drivers of EA private sector lending (Source: ECB; CMMP)
As discussed in previous posts, QE has simply fuelled the shift away from COCO-based lending towards FIRE-based lending in the euro area. This trend has negative implications for future growth, leverage, financial stability and income inequality. Hence, the ECB’s calls in November last year for measures to mitigate risks from FIRE-based lending were welcome. Germany stands out in this context, given the combination of house price dynamics, the extent of house price overvaluation and the lack of specific macroprudential measures to address these risks.
Conclusion
Throughout 2021, CMMP analysis focused on three key signals from the money sector: monthly HH deposit flows (behaviour proxy); trends in consumer credit (growth proxy); and the level of synchronisation of money and credit cycles (policy proxy). These remain important indicators in 2022 to which I will add a key focus on the mix of lending and the potential impact on any new macroprudential measures. Watch this space…
Trends in EM private sector debt ($bn) and debt ratio (% GDP) since the GFC (Source: BIS; CMMP)
The key message
In this fifth post in my “Global Debt Dynamics” series, I consider the hypothesis that the “EM-debt” story has been replaced by the “China-debt” story.
At its simplest, the EM-debt story refers to the sharp increase in the EM share of global private sector credit (PSC) and the narrowing of the gap between the aggregate PSC debt ratios for advanced (DM) and emerging (EM) economies since the global financial crisis (GFC).
The EM share of global PSC has increased sharply from 16% in 2Q08 to 38% in 2Q21. Over the same period, the gap between the PS debt ratios has narrowed from 86ppt to only 8ppt. This represents a remarkable structural shift from DM to EM economies.
Strip out China, however, and the EM share of global PSC is largely unchanged since the GFC. China has accounted for 20ppt of the 22ppt increase in market share described above and currently accounts for almost 70% of total EM PSC alone. For added perspective, China’s outstanding stock of PSC ($37tr) is c.10x and c.14x the outstanding stock in Korea and India respectively, the second and third largest EM PSC markets. Viewed from the narrow perspective of relative size and growth, there is some support for the hypothesis that the China debt story has replaced the EM debt story, or at least overtaken it.
There are two problems with this conclusion however: (1) it relies on an overly narrow view of global debt dynamics; and (2) in truth, there is no such thing as an EM debt story in the first place.
The EM universe includes a group of over 20 economies with very heterogeneous debt dynamics in terms of the level of indebtedness, the rate of excess credit growth and affordability of debt:
For most EM economies, the “potential-growth” story remains in both the NFC and HH sectors
Some of the fastest rates of excess credit growth are occuring in EM economies that already exhibit relatively high levels of indebtedness
Elevated affordability risks in a number of EM economies is of concern given the expected future direction of global rates
While the EM classification remains convenient, it is increasingly less relevant in terms of understanding the impact of debt dynamics on macro policy, investment decisions and financial stability.
Replace the EM debt story with individual EM country debt stories not just the China version.
EM debt dynamics
At its simplest, the so-called, “EM-debt” story refers to the sharp increase in EM’s share of global PSC and the rapid narrowing in the gap between the average PSC debt ratios in advanced (DM) and EM economies since the Global Financial Crisis (GFC).
Trends in private sector debt ($tr) and debt ratio (% GDP) since the GFC (Source: BIS; CMMP)
The outstanding stock of EM PSC has grown from $14tr in 2Q08 to $54tr in 2Q21, a nominal CAGR of 11.5% (see graph above). Over the same period, the outstanding stock of DM PSC has risen from $71tr to $87tr, a nominal CAGR of only 1.5%.
Breakdown of global PSC (% total) since the GFC (Source: BIS; CMMP)
The EM share of global PSC has increased sharply from 16% in 2Q08 to 38% in 2Q21, while the DM share of global debt has fallen from 84% to 62% (see chart above). As discussed in “Global Debt Dynamics –II”, this structural shift from DM to EM is one of the two key structural changes that have taken place in the global PSC market since the GFC (the other being the shift away from HH to NFC debt).
Trends in PSC debt ratios (% GDP) since the GFC (Source: BIS; CMMP)
The gap between the average DM and EM PSC debt ratio (debt % GDP) has also narrowed sharply since the GFC. At the end of 2Q08 the respective PSC debt ratios were 172% GDP and 86% GDP, a gap of 86ppt. At the end of 2Q21, the respective PSC debt ratios were 175% GDP and 167% GDP, a gap of only 8ppt (see chart above).
Trends in share of global PSC since GFC (Source: BIS; CMMP)
Strip out China, however, and the EM share of global PSC is largely unchanged since the GFC (see green line in chart above). China has accounted for 20ppt of the 22ppt increase in the increase in market share described above. As result, China’ share of EM PSC has risen from 36% to 68% over the period (and from 6% to 26% of global PSC).
China’s share of EM debt by category of debt (Source: BIS; CMMP)
China accounts for 64%, 68%, 71% and 61% of total, PSC, NFC and HH debt in EM respectively (see chart above). China’s outstanding stock of PSC ($37tr) is c.10x and c.14x the outstanding stock in Korea and India respectively, the second and third largest EM PSC markets (see chart below).
Relative size of PSC in largest EM PSC markets (Source: BIS; CMMP)
So in terms of relative growth, outstanding stock and relative size there are grounds for accepting the hypothesis that the EM story has been replaced by the China debt story. However, a key theme of CMMP analysis is that debt dynamics are not simply about the size/level of outstanding debt. There are other “chapters” to EM debt story including the levels of indebtedness, the growth rate in debt and the affordability of debt, for example.
EM HH debt ratios plotted against NFC debt ratios (Source: BIS; CMMP)
For most EM economies (as classified by the BIS) the potential “EM-growth” story remains. NFC and HH debt ratios in 16 EM economies remains below the 90% GDP and 85% GDP maximum threshold levels identified by the BIS (see chart above), for example. In contrast, elevated debt levels exist in both sectors in Hong Kong and Korea and in the NFC sector in China, Singapore and Chile.
NFC RGF plotted against NFC debt ratio (Source: BIS; CMMP)
As in DM, some of the fastest rates of excess credit growth are occurring in EM economies that already exhibit relatively high levels of indebtedness (for an explanation of the methodology, see here). In the NFC sector, for example, relatively high levels of excess credit growth have occurred in Hong Kong, Singapore, Korea, Chile and Saudi Arabia (see chart above). Similarly, relative high levels of excess HH credit growth have occurred in relatively indebted HH sectors in Korea, Hong Kong, Thailand, Malaysia and China (see graph below).
HH RGF plotted against HH debt ratio (Source: BIS; CMMP)
Elevated affordability risks in a number of EM economies is of concern given the likely future direction of global rates. Private sector debt ratios are not only high in absolute terms, but they are also above respective LT averages in Hong Kong, Turkey, China, and Brazil. Note in contrast the relatively low levels of affordability risk in CEE, Russia and India (see chart below).
Global DSR (x-axis) and deviations from LT averages (y-axis) (Source: BIS; CMMP)
Conclusion
In truth, there is no such thing as an EM debt story. The EM universe includes a group of economies with very heterogeneous debt dynamics. My financial stability heatmap summarising the debt dynamics of the 10 EM economies that account for over 90% of total EM PSC illustrated this clearly (see below).
Financial stability heatmap – top 10 EM economies (Source: CMMP)
So while the EM classification remains convenient, it is increasingly less relevant in terms of understanding the impact of debt dynamics on macro policy, investment decisions and financial stability.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.
