“Synchronised slowdowns?”

Mortgage flows slowing at a faster rate in the EA than in the UK

The key chart

Monthly mortgage flows (3m MVA) expressed as a multiple of pre-pandemic average flows (Source: BoE, ECB; CMMP)

The key message

November 2022 monthly mortgage flows point to a synchronised slowdown in mortgage demand in the UK and EA, but with a sharper rate of decline in the EA (driven by German and French dynamics). Mortgage demand typically displays a co-incident relationship with GDP growth. In this context, turning points are more significant than the rate of change. The key message here relates more to a synchronised slowdown in economic activity in both regions, therefore, rather than “point-scoring” between them!

Synchronised slowdowns?

Trends in UK monthly mortgage flow (£bn, LHS) and annual growth (% YoY, RHS)
(Source: BoE; CMMP)

Monthly UK mortgage flows rose to £4.4bn in November 2022, up from £3.6bn in October 2022. While this is well below the recent peak flow of £17bn in June 2021, it is above the pre-pandemic average flow of £3.9bn.

According to the latest, Bank of England data release (4 January 2022), approvals for house purchase, an indicator of future borrowing, decreased from 57,900 in October 2022 to 46,100 in November 2022, the lowest level since June 2020. It is reasonable, therefore, to expect lower UK flows in coming months.

Mortgage flows are slowing at a faster rate in the EA than in the UK. The 3m MVA of monthly mortgage flows in the EA has fallen from 2.1x pre-pandemic flows in July 2022 to 0.9x pre-pandemic flows in November 2022 (see key chart above). In contrast, UK monthly flows remain above pre-pandemic levels on a monthly basis (1.1x) and a smoothed basis (1.2x).

Mortgage demand typically displays a co-incident relationship with GDP growth. In this context, turning points are more significant than the rate of change. So, as above, the key message here relates more to a synchronised slowdown in economic activity in both regions rather than “point-scoring” between them!

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

“Negative for EA growth, but…”

Slowing EA mortgage demand is more positive for financial stability

The key chart

Trends in EA monthly mortgage flow (EUR bn, LHS) and annual growth (% YoY, RHS)
(Source: ECB; CMMP)

The key message

The euro area (EA) money sector continues to send a clear message of slowing mortgage demand in 4Q22, reflecting sharp slowdowns in Germany and France, the region’s two most important markets. While this may be disappointing for the EA growth outlook, it is more welcome from a financial stability perspective, given the vulnerabilities flagged in both markets in CMMP analysis over the past two years.

Negative for growth, but…

Trends in monthly EA mortgage flows (EUR bn)
(Source: ECB; CMMP)

The monthly EA mortgage flow was €9.3bn in November 2022, up from €8.4bn in October 2022 but well below the recent peak of €30.1bn in June 2022. The 3-month moving average fell to €11bn, the lowest level since May 2020 (see chart above).

Country drivers (in ppt) of EA mortgage growth (% YoY)
(Source: ECB; CMMP)

The annual growth rate in the outstanding stock of EA mortgages has slowed from the recent peak of 5.8% YoY in August 2021 to 4.6% YoY in November 2022. German and French mortgage demand are the main drivers of aggregate EA demand (see chart above). They contributed 1.8ppt and 1.2ppt of the total 4.6% YoY growth, for example.

Trends in EA, German and French mortgages (% YoY)
(Source: ECB; CMMP)

German mortgage growth has slowed from 7.2% YoY in August 2021 (2.0ppt contribution) to 5.9% YoY in November 2022, however. French mortgage growth has slowed even faster from 8.2% YoY in August 2021 (2.1ppt contribution) to 4.9% YoY in November 2022 (see chart above). In contrast, annual growth rates in the Netherlands and Italy, the third and fourth largest contributors, was higher in November 2022 (4.8% and 4.7% YoY respectively) than in August 2021 (3.4% and 4.3% respectively).

While this may be disappointing news for the growth outlook, it is more welcome from a financial stability perspective, given the vulnerabilities flagged in both markets.

CMMP analysis highlighted RRE vulnerabilities in Germany based on the combination of house price and lending dynamics, the extent of overvaluation and the lack of appropriate macroprudential measures back in November 2021 and warned of the risks associated with the rate of growth and affordability of French household sector debt in January 2022.

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

“Seven lessons from the money sector in 2022”

What have the “messages from the money sector” taught us?

The key chart

Visual summary of the CMMP framework linking all economic sectors together
(Source: CMMP)

The key message

The true value in analysing developments in global finance lies less in considering investments in banks’ equity and more in understanding the implications of the relationship between the money sector and the wider economy for macro policy, corporate strategy, investment decisions and asset allocation (see key chart above).

The 2022 “messages from the money sector” have taught us a great deal about macro policy (and its flaws), risks to financial stability and the transition from pandemic-economics to economic slowdown/recession in advanced economies.

Macro policy

Over the past twelve months, the money sector has reminded us that flawed macro thinking continues to drive macro policy in many advanced economies (lesson #1). The first flaw is to argue that governments (who enjoy monetary sovereignty) and households face the same spending and budgetary constraints. They do not. The second flaw is to largely ignore private sector debt. In a world that sees public debt as a problem but largely ignores private sector debt, it is common to overlook elevated private sector risks in Sweden, France, Korea, China and Canada (lesson #2). This is a mistake.

Financial stability risks

Among the sample of economies listed above, the banking sectors in China and Korea have the highest exposures to elevated private sector debt risks. Banks and investors share risks more equally in Sweden, France and Canada (lesson #3).

Rising levels of financial inequality are creating very real social, economic and political problems in many developed economies. Lower-income households have less flexibility to adjust their spending in response to rising prices and are less likely to have a cushion of savings to protect them. Does this justify sensational headlines about rising levels of consumer credit? Without playing down the genuine hardship that many are facing now, the answer is no (lesson #4).

Lower-income households hold relatively small shares of mortgage debt and consumer credit. Furthermore, a recovery in demand for consumer credit at the aggregate levels was a positive sign reflecting a normalisation of economic activity during 2022. This does not mean that complacency about rising NPLs is justified, however.

From pandemic-economics to economic slowdown/recession

Monetary cycles in the UK and EA have remained highly synchronised (despite Brexit) and pointed to a clear break from pandemic economics during 2022 (lesson #5).

Consumer credit is losing momentum, however, and sharply slowing real growth rates in money and credit point to slowdown/recession in 2023 (lesson #6).

The UK has already returned to the unsustainable world of pre-pandemic imbalances (lesson #7). The fact that this is an integral part of official forecasts returns us neatly to lesson #1 – flawed macro thinking drives current macro policy.

Thank you for reading and very best wishes for a very happy and healthy New Year

Seven lessons from the money sector in 2022

Lesson #1: flawed macro thinking drives macro policy

Trends in French debt ($bn) broken down by sector
(Source: BIS; CMMP)

Over the past twelve months, the money sector has reminded us that flawed macro thinking continues to drive macro policy in many advanced economies.

The first flaw argues that currency issuers (e.g. governments who enjoy monetary sovereignty) and currency users (e.g. households) face the same spending and budgetary. The second flaw sees public sector debt as a problem but largely ignores private sector debt.

Jeremy Hunt, the latest Chancellor of the Exchequer in the UK, argued recently that, “Families up and down the country have to balance their accounts at home and we must do the same as a government.” He was following in the well-trodden footsteps of Thatcher, Cameron, Osbourne and Sunak before him. In the past, this rhetoric and mistaken belief set was used to justify austerity policies (which had well-documented, negative impacts on UK growth). Such arguments reflect a flawed understanding of how modern monetary systems work. They also ignore the fact that the correct fiscal response is the one that balances the economy not the budget.

Back in February 2022, France’s state auditor sounded the alarm about the impact of pandemic spending on France’s widening budget deficit and rising debt levels (see chart above). The auditor was factually correct to highlight the impact of pandemic spending on the government’s net borrowing but the analysis fell short in three important respects. First, the net borrowing of the French government was a necessary, timely and appropriate response to the scale of the private sector’s net lending/disinvestment. Second, while the outstanding stock of French government debt may be the fourth highest in the world, France ranks much lower in terms of government indebtedness. Third, from a risk and financial stability perspective, CMMP analysis is more concerned about France’s private sector debt dynamics, particularly in the corporate sector (see Lesson #2).

Lesson #2: its a mistake to ignore private debt

Trends in selected economies’ private sector debt ratios (% GDP)
(Source: BIS; CMMP)

In a world that sees public debt as a problem but largely ignores private sector debt, it is common to overlook elevated private sector risks in Sweden, France, Korea, China and Canada. This is 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.

Lesson #3: exposure of Chinese and Korean banks

Trends in selected bank credit ratios (% GDP)
(Source: BIS; CMMP)

Among the sample of economies listed above, the banking sectors in China and Korea have the highest exposures to elevated private sector debt risks. Banks and investors share risks more equally in Sweden, France and Canada.

In China, bank credit accounts for 84% of total private sector credit and the bank credit ratio of 184% GDP exceeds the peak-Spanish bank credit ratio of 168% GDP. Similarly, in Korea bank credit accounts for 73% of total private sector credit. The bank credit ratio of 161% GDP is slightly below the peak-Spain level but well above the peak-Japan level of 112%

In contrast, risks in Sweden, France and Canada are shared more equally between banks and investors (see chart above). Bank sector credit accounts for 51%, 50% and 49% of total private sector credit in Sweden, Canada and France respectively (reflecting the greater development of alternative sources of credit in advanced economies).This does not mean that banks are not exposed, however. The bank credit ratio in Sweden is 138% GDP, above the peak-Japan level. In France and Canada these ratios are the same or slightly below the peak-Japan level (112% GDP and 109% GDP respectively).

Lesson #4: the risks of rising financial inequality

Share of outstanding mortgages and consumer credit by UK income decile
(Source: BoE; CMMP)

Rising levels of financial inequality are creating very real social, economic and political problems in many developed economies. Lower-income households have less flexibility to adjust their spending in response to rising prices and are less likely to have a cushion of savings to protect them. Does this justify sensational headlines about rising levels of consumer credit? Without playing down the genuine hardship that many are facing now, the answer is no.

Lower-income households hold relatively small shares of mortgage and consumer credit in the UK and EA, for example. In the UK, the bottom-three income deciles account for 5% and 8% of the outstanding stock of mortgages and consumer credit respectively. Similarly in the euro area, the bottom-two income quintiles account for 13% of total household debt, albeit with significant variations at the country level. Furthermore, at the aggregate level, a recovery in demand for consumer credit is a positive sign reflecting a normalisation of economic activity rather than a sign of systemic stress/economic weakness.

This does not mean that complacency about rising NPLs is justified. According to the latest OBR forecasts, for example, the household debt servicing cost in the UK is set to rise from £60bn at the end of 4Q22 (3.8% of disposable income) to £107bn at the end of 4Q23 (6.6% of disposable income) and £125bn at the end of 4Q24 (7.5% of disposable income). Beyond that, the debt service ratio is assumed to stabilise at around 7.5% of disposable income. High but (perhaps conveniently?) below the 9.7% level seen at the time of the GFC.

Lesson #5: the break for pandemic-era economics

Trends in UK and EA broad money growth (% YoY)
(Source: BoE; ECB; CMMP)

Monetary cycles in the UK and EA have remained highly synchronised (despite Brexit) and pointed to a clear break from pandemic economics during 2022.

Pandemic-era economics was characterised by a spikes in broad money driven by the hoarding of cash by HHs and NFCs, subdued credit demand and a record desynchronization of money and credit cycles.

Broad money growth has slowed from a peak of 15.4% to 5.6% in the UK and from a peak of 12.5% to 5.1% in the EA. HHs and NFCs have stopped hoarding cash, monthly consumer credit flows have recovered and money and credit cycles have re-synched with each other. Mortgage demand, the key driver of so-called FIRE-based lending is also slowing, notably in the EA.

Lesson #6: lower consumer momentum and slower growth

Monthly consumer credit flows as a multiple of pre-pandemic average flows
(Source: FED; BoE; ECB; CMMP)

Consumer credit is losing momentum, however, and sharply slowing real growth rates in money and credit point to slowdown/recession in 2023.

Recall that in the face of falling real disposable incomes, HHs can either consume less, save less and/or borrow more – or a combination of these behaviours.

In relation to pre-COVID trends, US consumers repaid less consumer credit during the pandemic and have borrowed much more in the post-pandemic period than their UK and EA peers. Monthly flows of US consumer credit peaked at $45bn in March 2022 at 3x their pre-pandemic levels. According to the latest data release, they fell to $27bn in October 2022 but remain almost double pre-pandemic levels.

The messages from the respective money sectors is that downside risks to consumption remain more elevated in the EA and the UK where monthly consumer credit flows have already fallen back below pre-pandemic levels.

Real growth rates in M1, HH credit and NFC credit typically display leading, coincident and lagging relationships with real GDP. Each indicator is falling at an increasing rate in the UK and the EA. If historic relationships between these variables continue, this suggests a sharp deceleration in economic activity over the next quarters.

Lesson #7: the UK returns to the unsustainable pre-COVID world

Trends and forecasts for UK sector financial balances (% GDP)
(Source: OBR; CMMP)

The UK returned to the unsustainable world of pre-COVID economics with twin domestic sector deficits counterbalanced by significant current account deficits in 2022. The OBR expects these dynamics to continue throughout its forecast period to March 2028.

The good news for Jeremy Hunt, the Chancellor of the UK, is that the net financial deficit of the UK public sector is forecast to fall sharply and to trend to c2-3% of GDP throughout their forecast period. The bad news for UK households is that their net financial position is forecast to fall from its recent (and typical) surplus to sustained deficits of between 0.1% and 0.4% GDP. In short, the UK is set to become a nation of non-savers with households also spending more of their income on servicing their debt.

To return to the first lesson of 2022, the lack of appropriate health warnings and the implied structural shift in risk away from the public sector to the private sector here reflects either flaws in macro thinking and policy making and/or the heavy hand of reverse engineering. Neither are good news.

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

“Christmas cheer vs. bah, humbug”

Christmas Spirit is still alive in the UK, if slightly muted

The key chart

Trends in UK card payments versus pre-pandemic levels (Source: ONS; CMMP)

The key message

The message from the UK money sector is that the “Christmas Spirit” is very much alive, albeit in a slightly muted fashion compared to last year.

Monthly and weekly credit and debit card payments show increased activity in line with expected, pre-Christmas trends. Aggregate spending increased 5ppt from 101% of pre-pandemic levels (PPLs) in October 2022 to 106% PPLs in November 2022. On a weekly basis, aggregate spending rose 13ppt from 108% to 121% in the week to 1 December 2022.

Change (ppt) in monthly credit and debit card payments (Source: ONS; CMMP)
Change (ppt) in weekly credit and debit card payments (Source: ONS; CMMP)

The largest increases in spending were on so-called “delayable” items (including Christmas presents?). They rose by 14ppt on a monthly basis from 86% PPLs in October 2022 to 100% PPLs in November 2022 and by 22ppt on a weekly basis from 107% PPLs to 129% PPLs.

Again, these developments are in-line with expected, pre-Christmas trends. They are also supported by personal, anecdotal evidence of walking through a teeming Westfield Shopping Centre in Stratford, London yesterday on way to the highly recommended “ABBA Voyage” concert!

While aggregate card payments are up slightly on a YoY basis (2ppt), spending on delayable items is lower. Monthly and weekly payments on delayable items are down by 6ppt and 8ppt respectively over the past year. This is not surprising given the re-allocation of UK spending towards “work-related” and “staples” as a result of the impact of rising inflation on fuel, energy and food prices etc.

In short, inflation has dampened Christmas spirit in the UK, but it has not killed it off!

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

“Update required – Part IVb”

Seven reasons why China dominates global debt dynamics (in charts)

The key chart

Trends in private sector credit (US$ tr)
(Source: BIS; CMMP)

The key message

In this final “Update required” post, I consider China’s private sector dynamics (post-2Q16) and the exposure of the banking sector to these dynamics (see, “Update required – Part III”). I highlight seven reasons why China dominates global debt dynamics today and illustrate them graphically.

  • China has the largest outstanding stock of private sector debt globally ($39tr)
  • China’s market share of private sector debt has increased to 27% from 20% in 2Q16 (and only 6% in 2Q08)
  • In the process, China has eclipsed the “EM-debt” story – the share of EM ex-China has remained unchanged over the period
  • China’s debt dynamic has shifted from excess growth in corporate debt (well-known) to excess growth in household debt (less well-known)
  • The fact that the rate of growth matters, not just its level, is the first important lesson here
  • The second is that affordability matters – China’s private sector debt service ratio is elevated in absolute terms and against historical trends
  • With recent re-intermediation, the banking sector is relatively exposed to the risks associated with current debt dynamics. Bank sector debt ratios exceed the levels reached at the height of the Spanish private sector debt bubble, for example

Why China dominates global debt dynamics in charts

Chart 1: Size

Top-ten BIS reporting economies ranked by stock of private sector credit (US$ tr)
(Source: BIS; CMMP)

Chart 2: Market share

China’s share of total private sector, corporate (NFC) and household (HH) debt (% total)
(Source: BIS; CMMP)

Chart 3: Eclipsing the rest of EM

Breakdown of global private sector by region (% total)
(Source: BIS; CMMP)

Chart 4: Shifting debt dynamics

Trends in relative growth factors – 3Y CAGR in PSC versus 3Y CAGR in GDP
(Source: BIS; CMMP)

Chart 5: Rising affordability risks

Selected debt service ratios – deviation from 10Y average (ppt) plotted against 2Q22 level (%) (Source: BIS; CMMP)

Chart 6: Re-intermediation…

Bank credit as %age of total private sector credit
(Source: BIS; CMMP)

Chart 7: How exposed is the banking sector?

Comparison of PS and bank sector debt ratios – Spain versus China
(Source: BIS; CMMP)

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

“Update required – Part IVa”

How exposed are banking sectors to elevated private sector credit risks?

The key chart

Trends in selected bank credit ratios (% GDP)
(Source: BIS; CMMP)

The key message

How exposed are banking sectors to elevated private sector debt risks in Sweden, France, Korea, China and Canada?

Recall that these five economies have private sector debt ratios that exceed the “peak-bubble” level seen in Japan in 4Q94 and debt service ratios that are not only high in absolute terms but are also elevated in relation to their respective 10-year, average affordability levels. Twin warning signs.

The banking sectors in China and Korea have the highest exposures to elevated private sector debt risks among this sample (see key chart above):

  • China: bank credit accounts for 84% of total private sector credit and the bank credit ratio of 184% GDP exceeds the peak-Spanish bank credit ratio of 168% GDP;
  • Korea: bank credit accounts for 73% of total private sector credit. The bank credit ratio of 161% GDP is slightly below the peak-Spain level but well above the peak-Japan level of 112%.
Selected private sector credit ratios (% GDP) broken down by bank and non-bank credit
(Source: BIS; CMMP)

In contrast, risks in Sweden, France and Canada are shared more equally between banks and investors (see chart above). Bank sector credit accounts for 51%, 50% and 49% of total private sector credit in Sweden, Canada and France respectively (reflecting the greater development of alternative sources of credit in advanced economies).

This does not mean that banks are not exposed, however. The bank credit ratio in Sweden is 138% GDP, above the peak-Japan level. In France and Canada these ratios are the same or slightly below the peak-Japan level (112% GDP and 109% GDP respectively).

In short, risks remain real and elevated. In a world, that sees public sector debt as a problem but largely ignores private sector debt, this matters, or at least it should do…

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

“Update required – Part III”

The second 2017 chart in need of a refresh

The key chart

Trends in bank credit to the private non-financial sector in Japan, Spain and China (% GDP) (Source: BIS; CMMP)

The key message

This is the second chart from 2017 that needs updating. It follows directly from the first chart that illustrated how China was following in the footsteps of Japan and Spain in terms of private sector debt dynamics (see “Update required – Part I”).

The purpose of the second chart was to contrast the exposure of Spanish and Chinese banks to private sector indebtedness with the exposure of Japanese banks at the time of the Japanese debt bubble in the 1990s. It illustrated trends in bank credit to the private non-financial sector expressed as a percentage of GDP.

Trends in Japanese PS debt ratio (% GDP) and Bank credit to PS ratio (% GDP)
(Source: BIS; CMMP)

Japanese private sector indebtedness peaked in 4Q94 at 214% GDP. At the time, bank credit was 112% GDP, or 52% of total private sector debt. In other words, banks and investors largely shared Japanese private sector debt risks equally (see chart above).

In contrast, when Spanish private sector indebtedness peaked at 227% in 2Q10, bank credit was 168% GDP, or 74% of total private sector debt (see chart below).

Trends in Spanish and Chinese PS debt ratios (% GDP) and Bank credit to PS ratios (% GDP)
(Source: BIS; CMMP)

When I first published the chart above, Chinese private sector indebtedness was 202% of GDP. Bank credit was 157% GDP, or 77% of total private sector debt (see chart above).

In short, Spanish and Chinese banks were more exposed to excess private sector indebtedness than their Japanese peers had been before them. This reflected not only the relatively high level of indebtedness, but also the relatively important roles played by Spanish and Chinese banks in terms of the supply of credit to the private sector.

This leads to two obvious questions:

  1. What has happened to China’s private sector debt dynamics subsequently and how exposed is the banking sector today?
  2. How exposed are the Swedish, French, Korean and Canadian banking sectors to the elevated private sector indebtedness levels, highlighted in “Update required – Part II”?

“Update required – Part II”

Five economies to watch – elevated private sector debt risks

The key chart

Trends in selected economies’ private sector debt ratios (% GDP)
(Source: BIS; CMMP)

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

Trends in global private sector debt ($tr) and debt ratio (% GDP, RHS)
(Source: BIS; CMMP)

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.

Private sector debt ratios (% GDP) as at the end of 2Q22
(Source: BIS; CMMP)

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).

HH debt ratios (% GDP) plotted against NFC debt ratios for 2Q21 and 2Q22
(Source: BIS; CMMP)

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
Trends in selected economies’ private sector debt ratios (% GDP)
(Source: BIS; CMMP)

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.

Debt service ratios – deviation from 10Y ave versus current level as at end 2Q22
(Source: BIS; CMMP)

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.

“Update required – Part I”

History rhymes – but this chart still needs refreshing

“The key chart”

Trends in Japanese, Spanish and Chinese private sector debt % GDP ratios (Source: BIS; CMMP)

The key message

I published this chart for the first time in 2017 to ask whether history was repeating itself in terms of private sector indebtedness – was China following in the footsteps of Japan and Spain?

It was also an opportunity to flag the rapid rise in household (HH) debt in China (see also, “Too much, too soon“), and to highlight the risks associated with rapid rates of growth in debt (see also, “Beyond the headlines“)

These trends and risks are understood better today (and the same chart has been reproduced many times by different people) – but the chart is in urgent need of an update. The reasons will be revealed later today when the BIS releases its 2Q22 update of global credit…

“Steady as she slows – Part III”

EA and UK money sectors sending cautious consumption messages

The key chart

Monthly consumer credit flows as a multiple of pre-pandemic average flows (Source: BoE; ECB; CMMP)

The key message

Monthly consumer credit flows in the euro area (EA) and the UK bounced slightly in October 2022 but momentum appears to be weakening. The regions’ money sectors are sending cautious messages about the outlook for consumption and growth.

Monthly EA consumer credit flows as a multiple of pre-pandemic average flows (Source: ECB; CMMP)

In the EA, the monthly flow of consumer credit was €2.4bn in October 2022, up from €1.9bn in September 2022. (Note that September was revised down from €4.8bn previously). This flow was only 0.7x the pre-pandemic average of €3.4bn. The 3m MVA of monthly flows was €1.4bn, only 0.4x its pre-pandemic average. Smoothed monthly flows have yet to recover to pre-pandemic levels, confirming that risks to EA economic growth lie in the lack of demand for consumer credit.

Monthly UK consumer credit flows as a multiple of pre-pandemic average flows (Source: BoE; CMMP)

In the UK, the monthly flow of consumer credit was £0.8bn in October 2022, up from £0.6bn in September 2022. This flow was only 0.6x the pre-pandemic average of £1.2bn, however. The 3m MVA of monthly flows was £0.9bn, only 0.7x its pre-pandemic average. Last month I suggested that the risks to the UK economic outlook lay in demand for consumer credit stalling. This remains the case.

In the face of falling real disposable incomes, EA and UK households have the option to reduce consumption, reducing their rates and/or stock of savings, and/or borrow more.

Given that excess savings typically accrue to HHs with relatively low marginal propensities to consume, the flow of consumer credit becomes an important indicator in terms of the relative strength of the EA and UK economies and the risks to future growth.

With momentum slowing here, the downside risks are mounting in both regions.

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